Time Stamps (Foreign Exchange)

Andrea Leadsom Excerpts

Tuesday 3rd February 2015 Westminster Hall

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a pleasure to serve under your chairmanship, Ms Dorries. I congratulate the hon. Member for Great Grimsby (Austin Mitchell) on securing this debate on the incredibly important subject of foreign exchange manipulation. He will have been as disgusted as I was to learn about the benchmark rigging that has gone on in financial markets and the various tales of banking misconduct that have shocked and disgusted everyone. I assure him that I do not think that the Treasury or the Bank of England are naive in their determination to weed out bad practice.

By way of background, the foreign exchange market underpins the global financial system. It enables international trade in goods and services, cross-border investment and monetary policy, so it is critical to ensure that it is well functioning and fair for the benefit of countries, businesses and consumers. As the hon. Gentleman pointed out, the UK is the largest single market for foreign exchange trading. In 2013, more than 40% of global foreign exchange trading took place in the UK, supporting an enormous number of jobs and enormous investment in this country.

The foreign exchange market is one of the most deep and liquid markets. It has contributed to efficient wholesale markets in which the turnover can be as high as $2 trillion a day in the UK alone. However, it is vital that all end users can benefit from the market, so we welcome the growth of specialist foreign exchange providers that compete with existing banks for the foreign exchange business of smaller businesses and retail consumers.

On tackling market misconduct, we expect firms operating in foreign exchange markets to adhere to the highest standards of conduct. Where they do not do so, we will take action to prevent and punish bad behaviour, as shown by the recent enforcement actions taken by the Financial Conduct Authority against five banks. The attempts by some banks to manipulate certain foreign exchange benchmarks were totally unacceptable and disgraceful. The Government and the regulators have taken tough action to punish such behaviour and prevent such scandals from happening in the future. The hon. Gentleman will know that the Serious Fraud Office has opened criminal investigations into certain types of market misconduct, and those investigations are ongoing.

First, the Government established the FCA with a specific remit of focusing on the conduct of our financial sector. Secondly, we have laid before Parliament a statutory instrument to extend regulation to the key foreign exchange benchmark: the WM/Reuters London 4 pm closing spot rate. The manipulation of that and six further financial benchmarks will be a criminal offence from 1 April 2015. Thirdly, we have established the fair and effective markets review to conduct a comprehensive and forward-looking assessment of how wholesale financial markets operate, to help to restore trust in those markets in the wake of a number of recent high-profile abuses, and to influence the international debate on trading practices. The review will examine in particular how the wholesale fixed-income, currency and commodity financial markets operate. It will provide recommendations on how the fairness and effectiveness of such markets can be improved.

The Government recognise that market structure and transparency play an important role in making markets more effective. Although the foreign exchange market is predominately an over-the-counter market in which transactions occur bilaterally between market participants, over the past 10 years it has been at the forefront of the electronic trading revolution. The electronic trading side now accounts for more than 60% of foreign exchange trading in spot markets, which has brought significant improvements in efficiency and transparency to market participants.

The use of electronic trading is most prevalent in the wholesale market, however, so it is right for us to consider whether the process of technological development has gone far enough to improve the fairness and effectiveness of markets, or whether we need to take further steps. The principle that how a transaction will be priced should be understood by market participants at the time when they enter into the transaction should always apply.

To deal specifically with time-stamping, the hon. Gentleman argued that if firms were required to provide time stamps for foreign exchange transactions that do not occur at the time of any agreement to enter into such a transaction, it could bring additional transparency to the market. He is of course right that time-stamping would prove the point at which the trade was done. High-quality record keeping is integral to how all financial services firms, including foreign exchange dealers, should organise themselves and operate, so I agree that it is important for firms to keep appropriate records of transactions with clients.

Time-stamping, however, presents some practical challenges. First, the key one is that market participants can use the time stamp only if they have access to a data feed of foreign exchange market prices, but such reference data are not publicly available other than at significant cost. Furthermore, as transactions are undertaken bilaterally, there is no central market for all foreign exchange transactions, so any consolidated tape of transactions would capture only a part of the market. The price of such transactions would also not necessarily be directly comparable. In foreign exchange, the price of each transaction may take into account a range of factors specific to that transaction, such as assessments of creditworthiness.

Secondly, when the foreign exchange dealer acted as agent, market participants would need to understand how the transaction had been priced to understand whether they were charged accurately. The interbank rate cannot be expected to be available to all market participants, for example.

Thirdly, when the foreign exchange dealer acts as principal, it could be argued that what is more important than a time stamp is access to a range of competitive quotes, which indicates that the issue of time-stamping transactions needs to be considered in the wider context of market structure and competition.

Clearly, the main purpose of a time stamp would be to create an audit trail for a market participant to detect mispricing of foreign exchange transactions. We should be clear, however, that if clients were misled about the pricing of foreign exchange transactions, such an act would be fraudulent.

I will talk a bit more about the fair and effective markets review, which I hope will give the hon. Gentleman some comfort.

[Austin Mitchell]

I am grateful to the Minister for her reply, but the difficulties that she has posed are not insuperable—they can be overcome. A time stamp is easier with electronic trading than with other forms of trading, but it should be used in all kinds of trades, because if there is a time stamp the client has the ability to look at the price range that day. The client might not know the total trading, but he can look at the price range and see what time the transaction was made, so he will know whether he was getting a fair deal and a proper price. That is the important thing—to put the knowledge in the hands of the consumer. The difficulties can easily be got around with a will to do so. The question is, why has the Bank of England been allowed to drag its feet on the issue for so long? Why not put that in straight away?

[Andrea Leadsom]

All I can do is repeat what I said, which is that the interbank price is one price, but that will not be the price for a retail investor, such as someone going on holiday or a small business. If we time-stamp a transaction, we will have to have the specific price of that transaction at a given time, and that information is simply not available. For the time stamp to be useful, we would have to know what the market was at that precise time. As the hon. Gentleman pointed out himself, a few basis points make a world of difference to the profits for the trader, so if one were minded to rig the price for a consumer or a business, even a sizeable one, and to commit fraud, even a time stamp need not prevent the fraudulent activity, simply because it would be difficult to pin down what the actual price should have been.

The Government established the fair and effective markets review so that careful analysis of the fixed-income, currency and commodity markets could be undertaken. Part of the review will be to consider whether there should be further regulatory tools available in foreign exchange markets, including whether there is a need for further criminal sanctions. The review will also consider the market structure and whether it can be improved through regulatory intervention or market-led action. Obviously the Government cannot prejudge the outcome of the review, but those conducting it will be well aware of the issues raised by the hon. Gentleman and will be taking his views into account. The Government will consider the recommendations of the review once it reports in June and will provide a response.

In conclusion, the time-stamping of transactions needs to be considered in the context of improving the overall fairness and effectiveness of the foreign exchange market. Foreign exchange markets are by their nature the most global of all the financial markets, so a consistent international approach to their regulation is essential. Where action is warranted, the UK should definitely lead the way in calling for and delivering it. I hope that I have reassured the hon. Gentleman of our commitment to ensure a fair and effective foreign exchange market—one that protects the customer while keeping the UK’s leading position internationally.

Question put and agreed to.