Over the last few months the topic of conduct risk, behavioural risk and general management concern around how to demonstrate to the regulators that a given business is behaving correctly, has come up again and again. As the conversations have focused in on areas of concern, the topic of “last look” and how price makers are managing the risk of e-distribution of prices is attracting attention. This round table was set up specifically to tease out the background to this methodology, the current implementations, some potential issues such as they are; and any potential remedial approaches.

Some argue that last look is a necessary protection in order to provide broad customer pricing, whilst others suggest it encourages unfair advantage to the price makers.

FMR Advisory was established with the area of conduct risk as one of two core competencies and is providing a forum where industry practitioners can meet and discuss topics in a frank and open way. The FMR Advisory Round Table was held on Monday 15th December under Chatham House rules at the Capital Club, with invited representation from the banking, legal, infrastructure provider and broker communities. A highly topical discussion highlighted a number of key themes, questions and responses.

Themes to examine at the round table:

• Where did “last look” come from and how has its use developed?
• How is “last look’ currently being used?
• What might the regulatory approach be to “last look”
• Where are any potential issues in current implementations?
• What might any remedial action look like?
• What might happen if no proactive action is taken?

Attendees

Robin Poynder – Director, FMR Advisory
Anna Aleka – Manager, FMR Advisory
Jon Healey – Head of global FX & FI eCommerce, BBVA
Al Crane – Head of liquidity management, SEB
Robert Entenman – Global head of eCommerce, Unicredit Jeff Ward – Head of EBS Direct, EBS
John Estrada – Global head of eFX, Credit Suisse
Mike Williams – President, Cürex

Summary

In summarising, a number of key points were emphasised. Last look is a protection mechanism for price makers that has evolved over many years and continues to evolve. The main market operators are already further evolving their approach to how last look is implemented and managed, acknowledging that a group of clients who are of significant importance to the wider market are actively requesting last look implementation. The two main points around current understanding of best practice is that the clients whose price stream is affected by last look should have consciously selected that implementation and that the use of last look in general is not used as a profit-generating mechanism per se, but is rather a pricing tool that allows tighter spreads for those relevant clients and as a protection mechanism for ePricing. One participant suggested the following: “Summarising – we see last look as a safety mechanism yes, not as a mechanism to generate profit. No front running/pre-hedging in principal based trading. Without last look, the price layering that currently operates across the venues would not be able to persist in its current form. Customers would be faced with fewer and wider prices.”

A wide range of market price-makers are actively examining their policies to find a default approach to price distribution where last look is enacted in a controlled and defined manner. Its use as an error capture mechanism is key, as a protection that allows better pricing to a wide range of clients, however the consensus was that clients should have to opt in to this as an active choice, with a default to the wide mass of SME clients being no last look pricing. Being a market leader in any evolution carries its own risk. As one participant put it regarding implementing this kind of policy, “my biggest fear is that clients opt out with us but have last look implemented with everyone else and then complain about how our spreads are horrible.”

Mike Williams pointed out that while the customer is correctly at the heart of the discussion, there should be some thought for the price maker. “Liquidity provision is an art form. Protecting and encouraging liquidity providers is critical. Not doing so will be detrimental to the market and all participants.”

The members of this round table felt that a second occasion to meet and further discuss the issues surrounding best practice of last look implementation would be of benefit and so FMR Advisory has organised a follow-up round table for Friday 20th February.

The full round table report is available to view through the FMR Advisory, and can be accessed by clicking here.

Anyone interested in joining this debate should contact Anna Aleka at FMR Advisory (anna.aleka@fmradvisory.com).