The Investment Association (IA) has raised concerns that ‘last look’ practices in FX trading are no longer acceptable due to misuse of information by liquidity providers.
Last look affords liquidity providers such as banks the opportunity to decline or accept a trade request, but the IA is concerned it can negatively affect asset managers.
The association highlighted various misuses including pre-hedging during the last look window, and trading based on information derived from rejected trades or from a request for quotation in progress or not yet won.
The IA is now calling for greater transparency as the use of last look methods means asset managers lack clarity on trades that have been declined.
“Investors have long been concerned about the lack of transparency around last look,” said Galina Dimitrova, director of investment and capital markets at the IA.
“We want to ensure that the FX markets are fair and effective as this benefits investors by enabling asset managers to make efficient and productive investments on their behalf.”
The IA has urged banks and liquidity providers to publish a clear definition of last look and their procedures, as well as formally telling clients when last look has been applied.
Under the guidelines, the IA has asked that liquidity providers offer time stamps accurate to the millisecond and other data disclosures.
For large trades that need to broken down into a series of small trades, the IA has recommended that data is provided to clients for each trade.
It added that although overall performance of a large trade may look good versus an expected benchmark, it could mask costs missed by individual transactions.
“Building on the best practice outlined by the FX Global Code of Conduct, our recommendations will provide asset managers with much-needed information on their trades so that they can fully understand the impact of Last Look on their business,” Dimitrova concluded.