The FX Global Code is an attempt to promote best practice through a series of principles, rather than rules. Will it become a beacon of probity for a foreign exchange market that has been battered by scandals and fines?
- The FX Global Code delivers 55 global principles with the intention of promoting a robust, fair, liquid, open, and appropriately transparent foreign exchange market.
- The FX Global Code’s six leading principles are: Ethics, Governance, Information Sharing, Execution, Risk Management & Compliance, and Confirmation & Settlement.
- An Adherence Statement requires a deeper investment in adapting procedures and ensuring all employees have the correct level of knowledge.
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The FX Global Code is a set of global principles detailing best practice in the foreign exchange market, developed to provide a common group of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market.
It is intended to promote a robust, fair, liquid, open, and appropriately transparent market.
The FX Global Code delivers 55 global principles, built around six leading principles and enriched by an instructive section of illustrative examples.
Principles not rules
The past five years of evolution in the financial markets, has seen a path of change defined by the growing role of regulations.
We can even argue that regulations have been shaping innovation within a market that was seeking renewed trust from investors.
From MAR to EMIR, from MiFIR to FRTB and GDPR (just to mention a few), the mechanism of rules and fines dominated the scene, triggering huge investments from all market participants.
Similarly, the move from directives to regulations has been aimed at reducing room for interpretation to a minimum, thus creating a more level playing field.
A fascinating aspect of the FX Global Code is exactly its ambition to improve and unify behaviors with a set of principles and not rules.
The FX Global Code is not about setting a rule, defining the fine and waiting for the market to digest and adapt. It is about principles, values, behaviors and practices.
The new FX Global Code of conduct aims to be global, comprehensive, and adaptive enough to capture market evolutions. It is meant to be applicable and followed by each participant to the FX ecosystem, including all sides of the market (sell, buy and non-bank), platforms providers, and vendors.
Nevertheless, the FX Global Code is not imposing any legal or regulatory obligations on market participants, and does not replace existing law or regulations. It simply identifies global good practices and processes.
What makes the FX Global Code unique?
- Principles-based: the FX Global Code is built on principles universally recognized as best practices that were defined through the collaboration of public and private sectors. Such principles are less exposed to obsolescence compared with quantitative rules.
- Interpretation: compared with directives and regulations, the code needs to be interpreted and applied to each market participant’s characteristics. This requires implementation of learning paths and procedures affecting the full value chain, not just trading desks.
- Proportionality: market participants adopt the code in line with their level of engagement in the FX market and with the size and complexity of their operations.
- Global: the FX Global Code applies globally to all FX market participants, with very few exceptions (i.e. retail).
- Simplicity: the code is written in clear and simple language. It is relatively short and provides illustrative examples.
- Evolution: the code has a precise schedule and rhythm to make sure it is regularly reviewed in order that it can evolve and encompass all new market requirements. An annual review is followed by a deeper review every three years.
The FX Global Code drives investments and procedures, and mainly focuses on behaviors. That is why the learning path is crucial to make sure all individuals involved in this market are aligned and following a common set of guidelines.
Statements of Adherence: where are we?
Since the release of the code on May 2017, several registers have been created to collect a Statement of Adherence from all market participants.
Currently, we have nine public registers admitted to the Global Index of Public Registers. Overall, the Global Index displays the names of 395 market participants, although the number of unique names is slightly lower due to registration on multiple registers. The table below summarizes the FX Global Index content.
Apart from the nine public registers admitted to the FX Global Index, the ASSIOM FOREX association in Italy recently launched its own public register. This will most likely be included in the FX Global Index soon.
From a pure geographical distribution, the Asia-based registers collect more than half of the total market participants who made a Statement of Adherence. NEX and CLS were the first registers to appear on the market.
Adherence by market participant category
A closer look at the data from the Global Index reveals how adherence is progressing within the categories of market participants
So far, more than 70 percent of market participants who signed their Statement of Adherence are banks. This is followed by brokers (6 percent) and asset managers (5 percent).
Corporate treasury departments make up just 2 percent. However, the recent launch of the EACT public register will have the impact of boosting numbers in the short to medium-term.
Nevertheless adoption of the FX Global Code by corporates and buy-side remains pivotal to code enforcement in the wider FX ecosystem.
Central banks play a special role here: firstly they are among the market participants covered by the code; and secondly they need to act as a good example to the entire market.
Furthermore, banks provide stimulus for the adoption of the FX Global Code. On this point, the ECB recently communicated how the adherence to the FX Global Code would be a prerequisite to membership of the Foreign Exchange Market Contact Group.
Turning adherence into a competitive advantage
Adherence is not just a statement to be signed and posted in one of the available public registers; it requires a deeper investment in adapting procedures and keeping employees at all levels equipped with the right levels of learning and knowledge.
This may partially justify a slower rate in collection of Statements of Adherence. The global Index of public registers allows all market participants to check which of their counterparties has adopted the code. Will this become a way to select with whom you do business?
Furthermore, the FX Global Code goes beyond some classic items such as Last Look or Market Color provision, but provides a clear indication on encouraging more electronic trading, the role of adequate record-keeping and adoption of greater scrutiny on the service received from counterparties — so Best Execution principles.
All of these fall under the concept of proportionality, requiring each player to adopt measures that are aligned with the size of their operations and role in the FX market.
The challenge is now to increase adherence on the buy-side and make sure this is not ‘una tantum’ activity but a continued effort to reinforce the market and to trust in it.
The lighthouse: values and conduct
It is widely acknowledged that when aiming to enhance a company’s behavior and results, any attempt to apply a new organizational architecture will probably fail if no investment is made on corporate values and individuals.
Values need to be easily codified with a clear terminology and be part of everyday actions and processes: kind of a lighthouse driving decisions at all levels.
The FX Global Code is a move in that direction.
It is a unique and important attempt to re-establish the power of ethics and conduct rules in a market where trust has been significantly challenged by an unprecedented sequence of scandals and fines; a market that relies on machines and speed more than ever; and a market that became dark and hazy in the sight of regulators and the public.
And in this fast, globalized world we live in, all interconnected foreign exchange is a key component of financial markets that need to function correctly.
We can observe that codes of conduct are not exclusive to foreign exchange. We also, have:
- The UK Money Markets Code
- LBMA — Global Precious Metals Code
And with machines predicted to dominate the trading scene, will we have to embed the principles of these codes of conduct in any artificial intelligence-based trading tool, too?
Our statement of commitment
We have signed a statement of commitment to the FX Global Code of Conduct (the Global Code), formally pledging adherence to the code’s standards to promote integrity, fairness, transparency and the effective functioning of the global foreign exchange markets.
We have played an active role in the development of the FX Global Code through our membership of the Market Participants Group and through participation in regional committees, including the London Foreign Exchange Joint Standing Committee, the Federal Reserve Bank of New York Foreign Exchange Committee, the Tokyo Foreign Exchange Market Committee, the Canadian Foreign Exchange Committee, and the Australian Foreign Exchange Committee.
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