As aftermath of FXCM disaster only just begins, industry thought indicates that compliance should be outsourced

Where is the conflict of interest now that FXCM’s trading against its clients has been outed? Some say in the execution, some say in compliance…

FX compliance on the minds of brokers

Ever since the ‘enlightened age’ of retail FX trading began at the turn of this decade, a period during which the MetaTrader 4 platform became able to connect to live market pricing via prime brokerages and execute directly using Tier 1 bank liquidity, the question mark that used to surround the perceived conflict of interest between broker and retail trader has largely faded.

invast pureprimeThe sophisticated liquidity management systems that now connect the ubiquitous MetaTrader platform to live liquidity have empowered both the small-deposit retail trader as well as brokerages on a low budget that do not have the capital resources to develop their own proprietary trading environment which has been the only way that retail traders could emulate the professional traders of Chicago, New York and London in times gone by.

Conflict of interest used to be a major concern in the early Millennial years, largely due to the intrinsic original design of the MetaTrader platform in that prior to the liquidity management firms having developed it into what it is today, it was a closed system which could only be used via its own dealing desk software, often with fixed spreads, which gave cause to a ‘me against the house’ environment.

Adam Ovesen

Thankfully, the practices of those days have largely been consigned to the history books, however yesterday’s absolute mindset-changing revelation that FXCM, one of the largest FX brokerages in the world, operating in the world’s most highly respected business environment, has been intentionally trading against its customers for several years, whilst all the while making continued public announcements to the absolute opposite tune, in that the firm purported to be operating an agency execution model.

The discovery by the US authorities that the firm and its CEO Drew Niv and senior Managing Director William Ahdout had orchestrated a very clever system that enabled them to conduct this absolute act of deception has resulted in the company being banned from the United States markets permanently, along with said senior executives, and 150 staff having been given the brown envelope.

FinanceFeeds has been speaking to several industry executives during the course of the past two days with regard to how activities like this can be mitigated, and it is certainly a discussion point that the question  mark over conflict of interest may well have largely disappeared from the relationship between trader and brokerage, but has now surfaced with regard to the relationship between brokerage and internal compliance department.

Adam Ovesen, a highly experienced senior FX industry executive with institutional background in risk management and prime brokerage provision this morning explained to FinanceFeeds “This is a shocker.”

Mr. Ovesen, who has spent the past three years as a Risk Manager at Metdist Group of Companies, where he is responsible for Hedging exposure as well as managing price and forward risk on LME futures, preceded by two years as Head of Institutional Sales at prime brokerage TopFX in Cyprus, a firm he joined from Saxo Bank, continued to provide his opinion, stating “This is a complete failure of the compliance function amongst other things. There is a deep conflict of interest between being paid by the company you are supposed to monitor, and monitoring it. Perhaps compliance should be externalised completely?”

Ron Finberg, an internationally renowned FX industry expert whose in depth analysis and thought leadership is widely regarded across the electronic trading sector this morning spoke to FinanceFeeds with regard to this matter.

“Outsourcing compliance functions is harder said than done because regulators don’t allow firms to ‘outsource’ their legal liabilities to third parties” said Mr. Finberg.

Ron Finberg

“The most common example is where regulators require brokers to be involved with the KYC/AML obligations of their clients and not to outsource it to third parties, although you can use third party solutions to help with verifications” continued Mr. Finberg, who is responsible for Business Development at boutique financial technology company Cappitech.

Having discussed the potential rationale for complete externalization of compliance functions, Mr. Finberg explained “In terms of your question of whether there is a conflict of interest of having the compliance officer paid by the broker, this is what audits by independent firms are for to review how brokers are in fact complying with regulation.”

This is certainly food for thought and it is currently unknown as to whether regulatory authorities are beginning to investigate this, as absolutely no regulator will ever divulge their progress on this matter even if it is on the agenda.

Compliance officers in regions of the world with highly developed financial markets economies, especially those with highly sophisticated technology that powers the financial markets infrastructure, are currently in high demand and in London last year were commanding between £1,000 and £1,200 per day as consultancy rates, which is higher than the salaries of some brokerage CEOs or top traders at Tier 1 banks.

This is because it is very difficult to find compliance officers who have high levels of understanding of what the regulators require from the firms that they oversee as well as full understanding of the technological topography that powers electronic financial markets as well as the trade reporting systems that are becoming increasingly automated between firm and regulator.

It is really only a matter of time before regulators begin to look at this, and maybe in future we may see companies such as PriceWaterhouseCoopers or Accenture becoming compliance specialists and combining it with their auditing and technology outsourcing departments.

Just a thought…..



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