The New York Department of Financial Services (NYDFS) recently announced that Barclays would pay a $150 million civil penalty and agree to other remedial measures for “misconduct related to automated, electronic foreign exchange (FX) trading through its ‘Last Look’ system.”

This action likely indicates future investigations by the NYDFS into the practice of “last look” by other FX market participants, including banks, non-bank market makers, and trading platforms.

About Last Look and the NYDFS Investigation

The NYDFS described the Barclays last look functionality as “an automated function that delays the [Barclays’s] response to a counterparty’s incoming client orders for a set period of time — called the ‘hold time’ — and rejects the order if the market price moves beyond a certain threshold during the hold time.”

The NYDFS did not pursue charges against Barclays for maintaining a last look functionality.  The NYDFS recognizes that last look can be a generally acceptable tool to protect market makers from “[t]he ever-increasing power of sophisticated automated electronic trading systems and technologies” which “might be able to exploit latencies in the flow of information by requesting trades at prices informed by information that Barclays and other market makers might not yet have.”

Rather, the NYDFS found that Barclays used its last look “as a general filter to reject customer orders that Barclays predicted, based on price movements during the hold period, would be unprofitable to [Barclays].”   The NYDFS cites a lack of disclosed transparency regarding Barclay’s last look policies and procedures or customer rejection rate information as part of the systemic fault in the company’s operations.  In response to the NYDFS investigation and as part of the remedial measures agreed to, Barclays adopted a symmetric last look protocol that would reject not just sufficiently unprofitable trades, but also trades similarly sufficiently unprofitable to Barclays’ customers.

Takeaways From the Settlement

The NYDFS settlement is likely the tip of the iceberg for last look investigations and settlements.  This development may expand beyond the NYDFS, as this case may cause federal regulatory agencies, including the Commodity Futures Trading Commission, to further explore the practice of last look and its application for market participants.

Market makers, including dealing banks and non-bank liquidity providers, should carefully review the disclosure provided to counterparts to ensure it is comprehensive and accurate.  Application of last look should also be scrutinized, as Barclays’ misconduct was partially due to the lack of consistent practices.  At the same time, internal compliance policies and procedures should be evaluated for sufficiency and companies must make certain that these policies and procedures are being followed by sales, technology, and compliance department employees.  Finally, information regarding use of certain rejection messages and providing customers with complete and accurate data related to specific rejection rate and turnaround times should be readily available. 

NYDFS Expands its Financial Services Reach

Created just four years ago, the NYDFS continues to demonstrate its aggressiveness as a financial services regulator consistent with its mission to “reform the regulation of financial services in New York to keep pace with the rapid and dynamic evolution of these industries, to guard against financial crises and to protect consumers and markets from fraud.”

The Barclays’ settlement is the latest in a string of cases brought against global financial market participants for misconduct, fraud, and abuse.  Unlike its federal counterparts, the NYDFS has developed a reputation for an “entrepreneurial” approach to investigations and moves much more quickly than federal agencies in investigating and punishing regulated entities.  As evidenced by past settlements with global financial institutions, the NYDFS reach extends well beyond the state of New York.

Market participants subject to NYDFS oversight should consider monitoring for any questionable behavior.  As evidenced by recent settlements, self-assessment and self-reporting of violations (material or otherwise) can lead to less stringent punitive measures by the regulator.