The Reserve Bank of Australia (RBA) has promised to adopt the first comprehensive global forex market code of conduct when it comes into effect in May 2017.
The code, being created by a working group under the auspices of the Bank for International Settlements’ Markets Committee, aims to rebuild trust and deter abuses in the world’s largest financial market, which has been plagued by scandals in recent years.
Global banks have paid over $US10 billion ($A14.2bn) in fines and settlements related to recent rigging activities in the forex market, which is worth more than $US5 trillion daily.
“There clearly needs to be a significant rebuilding of confidence in the way this market functions,” RBA assistant governor Guy Debelle, who is leading the group in his role as chair of the BIS Markets Committee, said in a joint briefing at the Bank of England overnight.
“There is a fairly clear lack of confidence in the industry and a lack of trust. Given financial markets need to rely on trust to function effectively the absence of that trust is impairing the effective function of the market.”
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Dr Debelle warned the code — which will be principles-based not rules-based — could not eliminate misbehaviour, but would enable it to be identified “sooner rather than later” and flushed out into the open.
The RBA has been expected to adopt the code, which aims to remove irregularities and clarify gaps in existing codes, including around stop loss orders, the difference between trading as a principal and a client agent, time stamps and general handling of orders.
The move also comes as the global forex market continues a major transition driven by the growth of electronic platforms and high-frequency trading.
“[It’s] an entirely different market to what it was five or six years ago when basically dealers were the only ones setting prices in the market,” CLS chief executive David Puth, who is chairing a private sector advisory group on the code, said.
“Even if we hadn’t had scandals the natural place to get to would be to have a single code,” Federal Reserve Bank of New York executive vice president and working group member Simon Potter added. “The urgency for doing that … is there now.”
Previous protocols added for various market participants over time no longer reflect the integrated nature of today’s industry, he said. “Sometimes it’s really hard to tell whether a buy side firm is acting a bit like a sell side firm.”
“Part of what we’re trying to do with the single code is just have one place for all market participants to go.”
A “reasonable chunk” of the new code will be published around May 2016, Dr Debelle said.
Promising to build on the “highest common denominators”, it will replace at least six local protocols operating among the largest markets. In all, there will be 15 participating countries in advanced and emerging economies — including the US, UK, Australia and Canada — and it follows work on a global preamble to existing central bank codes written last September.
It will cover all participants in the wholesale forex market, although there is some discussion about where that market starts and ends, Dr Debelle said.
A few specific national circumstances will be encapsulated by local ‘annexes’, and there are ambitions to extend geographically beyond the original 15.
But adoption will be voluntary, with local regulators left to decide sanctions in their own jurisdictions. Still, the working group has not ruled out recommending criminal, civil and other charges.
“We’ll look at all of those,” Dr Debelle said.
The UK last year made manipulation of currency markets and six other financial benchmarks a criminal offence, with penalties up to seven years’ imprisonment. In the European Union from 2016, financial market rigging will attract criminal penalties up to four years’ jail.
The biggest challenge, Dr Debelle emphasised, will be getting market participants to adopt the new code.
But Mr Puth said market participants are “highly motivated” to get the global protocols right. “I think [recent abuses] are something that has really driven the market to come together to say we do need to change this,” he said.
Meanwhile, a mechanism is envisaged to allow the code’s evolution to keep pace with progressing technologies and other circumstances beyond 2017.
Market liquidity is ultimately expected to improve rather than contract as a result of greater clarity of roles, Mr Puth said.
Source: Markets Spectator