Matt Kulkin, a partner at Steptoe and Johnson, explains to Profit & Loss deputy editor, Galen Stops, why a “copy and paste” approach to regulation won’t work for FX.
FX is often referred to as an “unregulated” or “self-regulated” market, and yet in recent years bans have been fined billions of dollars by regulators for alleged infractions in this market, while criminal charges are being brought against FX traders in the US courts.
Kulkin explains this disparity by pointing out that the entities involved this market are regulated and therefore subject to oversight by a various national authorities. However, unlike the securities markets or the OTC derivatives markets, there aren’t concrete regulations regarding the market place, he says.
“So there’s a natural inclining for some policy makers to say “what we’ve done in other markets we should do here [in FX]”, but there are unique characteristics in the FX market, both in it’s geography but also in the mechanisms by which it operates, that don’t allow for a copy and past of an equity market regime or even a futures market regime to just be applied here,” adds Kulkin.
He also discussed the impact of that the US election could have on the regulatory environment, stating that although he expected little to change in the short-term, “regardless, come January there will be new leadership at a lot of agencies, there will likely be new committee chairmen on Capital Hill and there’s going to be a lot of turnover”.
The result of this, says Kulkin, is that there needs to be a focused on getting these new regulators up to speed on the market discussions that have been evolving over the past few years.
Discussing regulatory enforcement, he highlights that although automated trading can provide regulators with an audit trail to investigate, it also makes some cases – such as those involving abusive market practices such as spoofing – much harder to prove.
“What’s been interesting recently is the electronification of FX markets makes it even harder for market participants or a government body to prove intent, because you can’t ask an algorithm what it meant to do and so there’s been a lot of debate at the CFTC about automated trading.
“You can reconstruct a trade and look at an audit trail but that doesn’t necessarily bring a prosecutor to the point of showing that there was an intentionally manipulative trade,” explains Kulkin.
Watch the full interview here: