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After Scandals & Ethical Lapses, Financial Industry Needs a Code of Conduct

A financial markets trade body is bringing a model code of conduct to participants who work in interest rates, FX, commodities, and derivatives. After a series of fines, can this help banks repair their reputations?

Everyone knows there have been ethical lapses on Wall Street, and its reputation has suffered with the public. Each day we read about another multimillion-dollar fine being slapped on a major financial institution. What used to be a rare event now seems like a daily occurrence.

Yesterday, The New York Times reported that RBC Capital Markets, an investment bank, was fined $76 million for conflicts of interest in working both sides of a deal. The firm was “advising the ambulance operator Rural/Metro on its $440 million sale in 2011, and RBC was also pitching to finance the buyer, private equity firm Warburg,” wrote the NYT.

In 2010, Goldman Sachs was accused of advising clients to purchase a toxic package of subprime mortgage securities. Goldman had worked with the hedge fund Paulson & Co., to structure and sell it to clients, so that Paulson could short the mortgage market. Within nine months, 97% of the mortgages were downgraded and had lost about $1 billion, reports The Guardian. The SEC filed a civil suit charging that Goldman defrauded investors of $1 billion -- while Paulson earned a profit of that same amount.

More recently, traders at major banks are facing accusations of manipulating LIBOR, a key interest rate benchmark. In March, the FDIC sued 16 of the world’s largest banks accusing them of cheating dozens of other now defunct banks by manipulating LIBOR. Allegedly, banks used the maniipulated rates to break swap contracts with these other banks so they were paid a different rate. Banks including UBS and Barclays have already paid $6 billion to resolve charges from European and US regulators. And there is “mounting evidence that foreign and American banks colluded to alter the price of foreign currencies,” reports The New York Times.

Perhaps what traders in OTC markets need is a new code of ethics spelling out individual and market behavior.

Yesterday, ACI - The Financial Markets Association, a financial markets trade body for members in wholesale markets, announced the launch of ACI Americas, its new association for the North American region.

The new division is for market professionals in North America working in FX, interest rates, and other securities, banknotes, precious metals, and commodities and derivatives. The ACI is for wholesale market professionals working in trading, sales, back office, and audit, product managers, banking engineers, brokers, and fund managers. The launch of the new regional association was marked at an official opening ceremony at Tribeca Rooftop in New York.

ACI will focus on market practices, education, and technology that other regional bodies have long supported, according to the release.

Most importantly, the new regional association will promote the ACI Model Code, providing detailed information and guidance on a range of issues that impact professionals working in North American financial markets.

“Our Model Code, Education Programs and international community of over 13,000 members in 65 different countries are what places ACI - Financial Markets Association in a class of its own. There is no other organization that was built by professional traders, for professional traders, with a strong global representation anywhere in the world,” comments Vincent Sangiovanni, President of ACI America in the association’s release.

Here is an example of the Model code:

Members commit to maintain, at all times, the highest possible standards in their profession by constantly setting an example of propriety and best ethical behaviour in business under all circumstances, in strict accordance with the content and spirit of The Model Code.

The 84-page code contains very specific guidelines for dealing practices, dealing through voice brokers and electronic broking, middle office practices, prime brokers, dealing with the back office, as well as handling disputes, complaints, and claims and controls, among other topics. On matters of personal conduct, it contains advice on handling drugs, alchohol, and substance abuse; gambling and betting between market participants; entertainment and gifts; dealing for personal accounts; misinformation and rumors; confidentiality and customer relationships; advice and liability.

At a time when the OTC financial markets are undergoing radical transfomation, ACI is entering the Americas region at an opportune time. After a series of trading scandals and regulatory fines for bad behavior, banks are starting to shift their policiies to reward adherence to values and behavioral guidelines.

Deutsche Bank's co-head of investment banking, Colin Fan, told the Financial Times that it's "no longer rewarding the best earners on the trading floor with a promotion or the highest bonuses if they are 'disruptive' or are not seen as team players." In fact, Deutsche Bank is seeing an outlflow of senior talent to less traditional banking and boutique firms, Fan told the FT, because they are more driven by earnings and not by adherence to rules.

Banks should be commended for making the shift. It will take role models at the financial firms to demonstrate model behavior and market integrity. That is the way to avoid these fines and repair the damage done to the industry's reputation.

Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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