May 25 marks the release of the full FX Global Code of Conduct, an event that has been much anticipated in FX circles. What will the Code bring to the FX industry and what are the key changes likely to be experienced by participants? Colin Lambert finds out.
It all starts – and to a degree ends – with Annex Three, which
sits at the end of one of the more important documents
released in the FX industry.
A lot has been debated and speculated over as the FX Code
of Conduct has been developed by the Bank for International
Settlements’ FX Working Group, but when it comes down to it,
the success or otherwise of two years’ work rests with Annex
Three, which states, “[Name of institution] (“Institution”) has
reviewed the content of the FX Global Code (“Code”) and
acknowledges that the Code represents a set of principles
generally recognised as good practice in the wholesale foreign
exchange market (“FX Market”).
The Institution confirms that it
acts as a Market Participant as defined by the Code, and is
committed to conducting its FX Market activities (“Activities”) in
a manner consistent with the principles of the Code. To this
end, the Institution has taken appropriate steps, based on the
size and complexity of its Activities, and the nature of its
engagement in the FX Market, to align its Activities with the
principles of the Code.”
Annex Three effectively commits the signing institution and
all of its employees to adherence to the 55 Principles laid out
in the Code across just 43 pages, (which incidentally ensures
the final work accurately reflects the original desire of FX
Working Group chair Guy Debelle that it is clear and concise).
Although direct, explicit attestation is voluntary, most market
participants expect widespread public adherence to the Code’s
values, not least because of peer pressure.
“If my closest five
competitors publicly state they are adhering to the Code and
my institution is not, we are not only going to look bad, but I am
likely to be having an endless stream of conversations with
customers in a probably futile effort to convince them we will
behave correctly,” observes the head of e-FX trading at a top
10 bank. “It’s easier to sign on the dotted line and make sure
that everyone internally in the bank is both aware of the Code’s
contents and what is required of them, than it is to explain why
we are out of step with our peers.”
The adherence aspect of the Code is the most critical
measure of its success – if the industry doesn’t buy in, then it
will struggle for long term recognition. But with almost 40
individual organisations that operate as a principle involved in
the creation of the Code (through membership of the Market
Participants Group), as well as intermediaries and the 16
central banks that supported the work, the Code has a strong
core base of support from which to build.
All members of the MPG have committed to adhering to the
Code and the central banks have publicly stated that they will
not transact any FX business with an institution that has not
signed up. If this practice can be extended throughout the
market, widespread adoption is a formality.
“We do expect
many of our customers to demand we attest to the Code,” says
the head of FX sales at a major regional bank. “I am not sure
whether all will go as far as to say they will not trade with non signatories – in some cases there are rules governing who
companies can trade with – but generally speaking, I believe
that not signing will be detrimental to a bank’s FX business.”
Equally, several senior managers at FX trading platforms
have told Profit & Loss that some of their biggest market
makers have told them they will not price to the platform if it
doesn’t commit to adherence. “There is definitely a need to be
seen to be clean,” one manager says.
Although the trigger for the Code was misconduct in banking
circles, there is a widespread acceptance that banks have
since cleaned up their act and are more than compliant, and
as such, attention is turning to how the full release will impact
different market segments.
Since the Code was first mooted, it has been made clear by
those responsible for its development that it is a set of
Principles expected to be adhered to by all market participants,
not just the major institutions. Customers have responsibilities
under the Code, as do third party vendors.
Most client segments have been able to get used to the
impact the Code will have upon them over the 12 months since
Stage One was released because that section included the
crucial areas of market colour, information sharing and order
handling. This means that any impact in these areas has
already been felt, however the release of the full Code – and
the industry’s adoption of it – could see communication
channels clearer than they have been for some while.
“The last 12-18 months has been very tough in terms of
accessing decent market colour and information – it’s been
like getting blood from a stone,” says the head of a currency
management firm. “There was something of an over-reaction to
the first stage in that several banks just clammed up and
wouldn’t tell you a thing.
“With the release of the full version, we are hoping that the
compliance structures are put in place quickly and we can start
getting information that is vital for our business,” the manager
continues. “We’re not asking for names and order details, but
we do need something to help us with the timing of our
executions and decision making.
“Some banks have been better at providing anonymised
information over the last six months, our hope is that others
get there soon,” the manager adds.
Another currency manager suggests that the advent of the Code
– but more definitively the banks’ reaction to the misconduct that
led to it – has allowed banks to pass even more responsibility onto
their clients. “In the past we would get data with an explanation as
to what the bank thought it meant,” the manager says. “Now we
get a data dump with no analysis. I think the banks have decided
there is just too much risk involved in trying to add value via an
approach that could be misconstrued. Banks are now competing
on the depth and quality of their market data, not the skill and
resourcefulness of their sales force.”
The head of FX sales at a regional bank tends to agree,
noting, “This is the end of a free ride for customers, they’re
going to have to work harder and take more responsibility
around their market decisions. Even if a bank does want to
provide analysis, it would be foolish to do so on a unique basis,
or even to a very small group of clients. Transparency as we
understand it now means any idea you have gets broadcast to
all customers simultaneously.
“In turn, this represents a challenge to the FX salesperson
because one of their potential differentiators – analysis and
market colour – will disappear.”
For those client segments predominantly made up of
hedgers – largely the asset manager and corporate community
– the Code has one requirement that may take some
adjustment. Principle 9 states that market participants acting
as clients must be aware of “the risks associated with the
transactions they request and undertake; and regularly
evaluate the execution they receive”.
A senior executive at a global asset manager believes more
clarity could be required around this clause, as well as that in
Principle 12, which says that market participants must not
enter orders into the market if they believe they will be
disruptive. “The problem as I see it is we don’t know about
minute-to-minute conditions in the FX market so how are we to
know whether our order is potentially disruptive? From what I
am told, the emphasis is on the service provider to state
whether an order could be disruptive – and refuse to accept it
– but I am not totally sure, and nor is my compliance function.
“I don’t believe any mechanistic hedgers like us have an
intent to disrupt the market, but if the ticket is large how we
execute it will have an impact,” the manager adds. “And we
don’t want to be in the firing line if a sharp sudden move,
caused by us executing an order according to our best
execution policy is seen to be disruptive.”
Another senior execution desk official at an Asian-based
asset manager also sees room for improvement in how asset
managers assess the quality of execution, observing wryly, “At
the moment, we execute mainly by telephone according to our
best execution policy, so our assessment of execution quality is
largely made up of us asking the counterparty where the
market is a few seconds after we traded.”
While accepting that more and more in the asset
management (and corporate) industry are adopting electronic
FX trading, the Asia-based execution official doesn’t see this as
a panacea. “Benchmarking the execution will be easier in an
electronic environment, but a TCA report reflects market
activity and so your order could have been disruptive, it could
have involved several points of slippage, but the TCA report will
only show it as ‘good’ when the reality was it was either badly
timed or badly handled.
“Look at the end-of-day London 4pm Fix,” the official
continues. “A large chunk of the asset management industry
believes that is best execution when more and more studies
show it is not. Will the industry need to look at this under the
Code? If it does, it faces a tremendous amount of work which
could involve every asset manager’s nightmare – re-writing the
A Competitive Advantage?
That some customers are still asking questions of – and in
some cases have misconceptions about – what the Code
actually demands of them, illustrates the challenge that
remains to ensure all participants fully understand its impact.
It also, however, offers a potential competitive advantage to
From the basic level of a firm offering TCA on executions,
through to the more sophisticated surveillance mechanisms,
opportunity would appear to be knocking for a number of firms.
At institutional level, any advantage is unlikely to come from
mere adherence – after all, once the six to 12 month period that
the BIS working group has been told it could take for institutions
to fully utilise the Statement of Commitment is up, the reality is
likely to be that all major participants will be fully compliant.
A more lasting competitive advantage could be gained from
helping customers not only establish their adherence
mechanisms, but also assisting them in maintaining a good
The last two years has seen two banks in particular make a
move in this direction, first Citi with its Command Centre and then JP Morgan with its client control tool – others are likely to
follow. What these products do is enable the client to embed in
its infrastructure rules around access to information, products
and services, and monitor who interacts within those rules.
While both products are base level permissioning platforms,
it is striking talking to firms on the buy side how few use
automation in their compliance function, especially in the pre-trade
area. Looking ahead, it is likely that an enhanced version
of such a service could become a deal maker for providers as
clients look for the best – and cheapest – solution to help
them remain compliant.
Another industry segment that could see competition arising
from the demands of the Code is the multi-dealer platform
sector. Although Principle 9 in the Code stresses that platform
providers should have rules that are transparent to users in
general, the burden on platform providers is relatively light.
This could change, however.
“I definitely think the platform operators can play a bigger
role in identifying potentially disruptive behaviour,” says the
global head of FX at a major bank. “These operators can
monitor and escalate any issues around last look and rejected
trades, as well as clamp down on activities like spoofing and
layering that are explicitly criticised in the Code.
“They can also help identify predatory client activity by
liaising closer with the LPs,” the global head continues. “That
probably needs some sort of legal agreement around the
information sharing – which should be on a need to know basis
and not with the LP’s trading function – but it would help if the
platforms could share timestamps and trading patterns with an
LP if the latter has genuine and serious concerns about
another participant’s behaviour.”
Whether or not service providers will risk damaging
potentially lucrative relationships with some customers by
helping to expose what some – but not all – consider to be
predatory trading, remains to be seen, however.
Will It Work?
Notwithstanding a last minute hiccup, the Global Code of
Conduct will come fully into force on May 25, 2017, and while
not everyone is, or can be, satisfied with its content, it at least
represents a big step forward for the FX industry. If nothing
else, there is widespread optimism that it may give enough
confidence to institutions, especially in the banking industry, to
loosen the reins on their FX businesses just a little.
“It’s all about clarity,” the global head of FX explains. “If
everyone is on the same page – staff and management and
institution – then there is less opportunity for
misunderstandings because we all know the boundaries. I do
think the industry went over the top in its reaction to the chat
room scandal – it was without doubt the worst case of
malpractice involving collusion I have seen, but it was still a
relative few – and the release of the full Code is a chance for it
to roll back some of the more draconian measures imposed at
“Some institutions will be quicker than others, but the good
news is that those leading the way in establishing a more
balanced, but still fully within the rules, compliance framework,
will likely see the benefit in a better relationship with their
customers,” the global head continues. “This hopefully means
we have a race to the top for once in our industry, rather than
the other way. It will be important not to go too far, but I am
confident most banks’ oversight teams have the line firmly
drawn in the sand for all to see.”
A key to the Code’s success may also lie in the industry’s
ability to actually sanction, in a meaningful way, miscreants.
At individual level in the major institutions there seems
little to worry about, for staffers should be made fully aware
of their responsibilities and be expected to behave
accordingly. If they step out of line, the sanction will likely
be suspension and dismissal – something that should go
on an employee’s record – after all, the threat of not being
able to work in the industry again should represent a
It is more of a challenge when the question turns to how
companies can be sanctioned. If laws are broken the legal
system will take its due course, but a breaking of principles is
an entirely different matter.
In the first instance, institutional misconduct will likely lead
to several market participants refusing to deal with the
offending institution, but will the news be spread far enough
and wide enough to actually give the potential miscreant
reason for pause? For that firm to have reason to fear
If that is not the case, then several people believe the first
major test for the Code will come when such an event occurs.
“It’s going to be the acid test,” suggests a senior market
figure in London. “We can make our statements and express
our support for it, but we will only really find out its
effectiveness if it can help in exposing misconduct and then
just as importantly be used as part of the punishment
If such a test is required, the hope is that it is not in the near
future, for it is important for the FX industry that it gets a
chance to bed in the Code and, hopefully, rebuild broken trust
While that crucial work is ongoing the industry is likely to
face more tests, if only via the string of legal actions pending
over alleged activities prior to the Code’s existence. It is
important that these actions are clearly identified as
happening in a very different environment to that which exists
post-Code if it is to have a chance to be seen to be effective in
the eyes of those outside the industry.
It is a sad but true fact of life, however, that misconduct
exists in all businesses, not just the financial industry. As one
senior e-FX manager observes, “It is hard to stop someone who
is intent on breaking the law.”
The e-FX manager says that the best the industry can do is
give clear guidelines and/or rules to ensure that accidental
infringement does not occur. “This involves layers of systems,
monitoring and good old fashioned policing to do what you can
to weed deliberate transgressors out,” the manager explains.
“If firms do this, they will have explained to their employees the
difference between right and wrong and they will have shown
their employees that they have the tools in place to catch them
if they take the wrong path.”
The e-FX manager echoes the views of many in the industry
when discussing why people take that wrong path?
“Sometimes it is because they have made a mistake and they
don’t feel they can admit it. Making it clear that no person or
firm is perfect, and that admitting an error or failure is not a
weakness, would normally resolve this.
“Normally, though, misconduct is about personal financial
gain,” the e-FX manager continues. “Over the past few years,
the regulators have shown they want to be tough on white
collar crime, which is a good deterrent, but firms need to play
their part too.
They need to ensure their promotion and pay
culture and incentives are more weighted towards customer
satisfaction, long term profitability, team culture and good
corporate citizenship. Yes revenues are important, of course
they are, but they cannot and should not be the only measure
of an individual. Establish this framework and you have the real
basis of cleaning up the financial industry, which is something
we all want to see.”