OSLO: The world’s biggest sovereign wealth fund has urged banks to do more to restore investors’ confidence in the global foreign exchange market after a series of scandals.
The $5tn-a-day market for currency trading is dominated by global banks, and Norges Bank Investment Management has taken aim at the controversial practice of “last look”.
This type of activity enables a bank trader to reject a customer deal at the very last moment, even after a client has agreed to the price, should problems arise with credit checks or market prices move dramatically.
In a white paper published on Friday, Norway’s $1tn oil fund also said that the currency market needed to apply some practices from equities trading to a more opaque market where most decisions were concentrated in the hands of a few banks.
NBIM, which invests mainly in equities, fixed income and real estate, said that three market practices were “particularly problematic” for asset managers. These include a lack of adequate risk controls and liabilities for the algorithms that execute trades and a lack of transparency for prices paid.
While the sovereign wealth fund stopped short of calling for an end to “last look”, it does seek changes in market customs “which may make last look obsolete long-term”, said Yazid Sharaiha, global head of investment strategies at NBIM and co-author of the report.
Many large fund managers accept that the custom of ‘’last look’’ is a price worth paying for traders at banks to execute their deals, but many are wary that some could use advance knowledge of a deal to benefit its own books ahead of clients’ interests. Regulators are undecided on the practice and some market participants, such as electronic traders Citadel Securities and DRW, have called for its demise.