As a reminder TFS - ICAP received fines of £3.4 by FCA and $7 million by the CFTC. Former senior managers Ian Dibb and Jeremy Woolfenden were fined $500,000 each and they agreed not to apply for registration for 5 years.
The offences of ‘printing trades’ and ‘flying prices’ might seem fairly arcane but can be reasonably explained in the context of the relevant TFS - ICAP businesses, broking of FX options.
‘Printing trades’ is an activity whereby brokers suggest trades have been executed that are actually fictitious. Brokers might do this to encourage an impression of liquidity and a market price and encourage dealers to execute options trades. TFS - ICAP did this verbally, over chats, and on the public dealing platform Volbroker. Notably they had dummy accounts set up on Volbroker where TFS – ICAP brokers were able to input bid and offer prices and create fictitious trades that would flash across the screens of market users of this platform giving the impression that other market users had genuinely traded at a certain level.
‘Flying prices’ is a related activity where brokers instead fictitiously indicate there is interest from a market participant to trade at a certain price. Again, the TFS - ICAP brokers did this verbally, over chats and on the public dealing platform Volbroker. Again, they used the dummy accounts on Volbroker to falsely create an impression that there were market participants willing to trade at those levels. This created a risk for TFS - ICAP that a market participant would hit one of these fake prices, where this happened the brokers would do their best to give excuses as to why the price was no longer valid and seek to get out of the trade.
What came through clearly in both the FCA and CFTC enforcement notices was the knowledge and involvement of senior management in these practices. The CFTC in particular are damning in their assessments of the actions (and inactions) of Mr Woolfenden and Mr Dibb in encouraging or allowing this practice. The CFTC note examples of Mr Woolfenden removing desk managers who were reluctant to fly prices and Mr Dibb deciding not to fire brokers out of fear they would blow the whistle on these practices.
So, what are the lessons for compliance and control functions?
1. Everyone else doing it…
It is a shame you cannot add light & sound effects to blogs because this would have sirens wailing, red lights flashing and bells ringing! This frequently comes up as an excuse offered by firms facing regulatory action and as everyone should know by now is the lamest of lame excuses to give to a regulator.
This practice will have been discussed between the brokers and their control functions. Compliance officers reading this can almost hear the comment from a broker “everyone does this” or “it is market practice”. It is always really important to take these casual conversations seriously and think about them more deeply. Ask yourself: what would this look like on the front page of the New York or London Times? How would you explain it to your regulators as meeting the spirit and not just the letter of their regulations? Would you be comfortable telling your mum and dad why you think this is OK?
If you work in compliance or another control function and have had a conversation like this remember you can always go back and revisit the topic, for example “I have been thinking about our conversation the other day and want to discuss further” or raising it with a responsible senior manager and asking them to explain why they are comfortable.
2. Remember your FX Global Code
Is this covered by the global code? You bet it is! Principle 12 of the code says: “Market Participants should not request transactions, create orders, or provide prices with the intent of disrupting market functioning or hindering the price discovery process.” The Annex to the code also gives an example of poor practice in relation to flying.
If you have not already done so it is worth carefully reviewing the FX Global Code (and its siblings for Money Markets and Precious Metals) and assessing if you are confident that your firm complies with the principles. Not least because the FCA has officially recognised these codes and said they are using these codes as their benchmark for what is and is not market practice. So irrespective of whether you’ve read or committed to the codes you will be held to the standards in them.
3. Adequacy of the compliance function
This comes through clearly in the FCA’s final notice as an area where the FCA viewed that weaknesses in compliance were a contributory factor. Firstly, they point to governance and the lack of senior management forum or board committee to cover compliance and conduct risks. Whilst this clearly falls on the top of the organisation, if you are a compliance officer or another control function, like risk, then you need to be jumping up and down about gaps like this, and make sure that your concerns are recorded. Properly minuted governance forums make it harder for important issues to get ducked or kicked to the long grass.
The FCA also strongly call out the lack of compliance framework at TFS - ICAP and some key knock-on impacts arising. Firstly, a lack adequate compliance monitoring in terms of having:
· a proper plan
· a sufficiently skilled team
· access to front office staff (brokers), and
· not being involved with issues overseas that they could have learned from.
Secondly the policies and procedures put in place were too high level and did not call out areas of market misconduct like printing and flying that should have been top of mind at a brokerage firm. Finally, training was generic and did not cover risks like printing, an external report commented that the training provided was a “generic tickbox exercise.”
Frameworks, monitoring, policies, and training may not be the sexiest parts of compliance but as this case shows they are crucial. As the FCA points out in their final notice TFS - ICAP were required to have an independent monitor from 2018 due to concerns about the quality of their monitoring.
4. Senior manager and institution impacts
There was some criticism in the press, such as the FT, about perceptions of low levels of fines and lack of action against individuals. At Leaman Crellin we are fairly sanguine about the amount of regulatory fines as often what is missed in the headlines is the iceberg effect of regulatory investigations in terms of the large remediation, investigation and legal advice costs that sit invisibly below the waterline of the headline fines.
Remember also that Mr Dibb and Mr Woolfenden were fined, and effectively banned by the CFTC. Plus, they will have likely incurred high personal legal and stress related costs as this process has dragged on over several years. Although not technically banned for life in the US or UK it seems hard to imagine any firm having the bottle to put them forward for regulated roles after the required period has elapsed. It would be hard to look past the US authorities finding that Mr Dibb and Mr Woolfenden failed to supervise.
A most interesting dimension in this case is how the CFTC used Dodd Frank against these UK based individuals. Mr Dibb as CEO was a Principal of a Swap Dealer as well as an Associated Person whilst Mr Woolfenden was an Associated Person of the Swap Dealer.
This is stark reminder to principals and associated persons of swap dealers based outside the US that authorities like the CFTC will come after you for serious wrongdoing. We know that the CFTC (in the guise of the NFA) have in recent years turned their focus more towards overseas swap dealers and this has included onsite inspections of swap dealers in London.
If you feel like you have gaps in some of these areas or just want to benchmark what you have in place we can help. For example, with a risk assessment document, market conduct training, drafting of policies and procedures, or FX code support.