NEW YORK (MNI) – After two years of hard work, the Foreign Exchange Working Group released the Global Code of Conduct for the foreign exchange industry Thursday, with market players, from traders to central bankers, expected to embrace and adopt the Code.
“The FX Global Code (Code) was created with the intention that it would become an integral part of the wholesale foreign exchange market (FX Market) globally and promote a robust, fair, liquid, open and appropriately transparent FX Market,” the FXWG said in the “Report on Adherence to the FX Global Code,” which accompanied the Code’s release.
“The Code is voluntary in nature and to be effective it will need to be embraced, adopted and adhered to by market participants across the FX Market,” the FXWG said.
The FXWG seeks to promote and incentivize “widespread adoption and adherence” to the Code, but recognizes that it may take six to 12 months for market participants in the FX market to understand and adopt the Code.
FX market players have the opportunity to sign a “Statement of Commitment” to show their adherence to the Code, which will allow other participants to better compare counterparties and service providers, the report said.
Central bankers will come on board also, by “using the Statement,” the FXWG said.
Central banks should also expect that “their regular FX trading counterparties adhere to the principles of the Code, except where this would inhibit the discharge of their legal duties or policy functions,” the report said.
“Central bank Governors have agreed that the Code will be collectively owned and maintained by the FXCs, through the Global Foreign Exchange Committee (GFXC) framework, a global association of FXCs, which has been launched alongside the publication of the Code,” the FXWG said.
Going forward, the GFXC “will assess regularly whether there are new market developments that warrant incorporation into the Code,” the report said.
The FX Global Code of Conduct covers myriad areas, including Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance and Confirmation and Settlement, with several “illustrative examples” of some of these topics.
The Code stressed that market participants should expect senior management to clearly articulate and model “desired practices and conduct” and take “appropriate steps to promote and reinforce all relevant personnel’s awareness” of such practices and conduct.
Senior management should make clear that “disciplinary or other action may result from unacceptable behaviors and transgressions of the Market Participant’s policies,” the Code said.
Many of the behaviors outlined in the Code are common sense practices that have been used by banks and other institutions for decades.
Principal 10 under the Code says “Market participants should handle orders fairly, with transparency, and in a manner consistent with the specific consideration relevant to different order types” and Principal 14 says “The Mark Up applied to Client transactions by Market Participants acting as Principal should be fair and reasonable.”
Handling orders “fairly” and “reasonable mark up” have long been debated by clients and traders, who often hold divergent views on these matters.
Some clients, hoping that “last look” would be done away with, were disappointed, with the Code noting only that those “employing last look should be transparent regarding its use and provide appropriate disclosures to Clients.”
The Code explains that “Last look is a practice utilized in Electronic Trading Activities whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price.”
However, in remarks to the press following the release of the code, Guy Debelle, RBA Deputy Governor and Chair of the FX Working Group, said the code, including ‘last look’ would remain under constant review.
“The GFXC will regularly assess whether new information or market developments warrant updates or additions being made to the Code,” Debelle said. “As the first example of this, given diversity of views on the use of last look in the market, the GFXC today is requesting feedback on trading in the last look window.”
“On a less frequent basis, the GFXC will oversee a more comprehensive review of the Code,” he added.
Currency traders were most concerned about “information sharing” and what can and cannot be appropriately shared with clients or those within their own organization.
The Code details what is considered “Confidential Information,” such as the “details of a Market Participants order book” or “orders for the benchmark fixes,” as well as the special circumstances when confidential information may be disseminated.
In the section on “Illustrative Examples,” the Code touched on a practice at times used by institutions that piggybacks on a client order.
Example: “A Client instructs a Market Participant to buy 5 billion USD/JPY at the 4 p.m. fix as part of a cross-border merger and acquisition transaction. After receiving this instruction, but before 4 p.m., the Market Participant buys 300 million USD/JPY for its own book, and not part of a risk management strategy for the transaction. After the 4 p.m. fix, the Market Participant sells 300m USD/JPY for its own book, with the sole intent of taking advantage of the price movement caused by the Client order.”
(This example does not explain how buying the $300 million dollar-yen ahead of the fixing might be allowed if “part of a risk management strategy for the transaction.”)
The Code chastises accordingly: “Market Participants should handle orders fairly and transparently, and the Confidential Information obtained from a Client is to be used only for the specific purpose for which it was given. In this example, the Market Participant instead uses its knowledge of the Client order and the expected market impact of the Fixing Order to gain profit for its own book, potentially disadvantaging the Client.”
To gauge the Code’s effectiveness, the Governors of BIS member central banks have recommended that the Markets Committee (MC) make an assessment of the Code after its adoption, the Report on Adherence to the FX Global Code noted.
The assessment is expected to take place three years after its May 2017 launch and “conducted in consultation with the GFXC,” the FXWG said.
Beginning Thursday, the Global Foreign Exchange Committee will have its own Web site:http://www.globalfxc.org/
By Vicki Schmelzer
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