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And Another Thing…

The world is awash with statements of commitment to the FX Global Code, although it is not easy keeping track of those who have signed thanks to yet more fragmentation in FX markets – the number of registers – and what appears to be a case of a lot of people saying they have committed but not actually being on a register (and while we’re at it, we could really do with just one register and compulsory listing).

I am told that approaching 80% of mainstream FX participants have signed a Statement of Commitment (SoC), which is excellent, but – and you knew this was coming – I am more interested in the 20% that haven’t signed. What are their reasons for not signing beyond being tied up by lawyers frightened of committing to anything?

I actually wonder if, rather than have registers for the SoCs that have been signed, we should actually have a register of those FX market participants that haven’t? It could operate as a quasi watch list for participants and ensure that while they may continue to trade with them, they should not be surprised if something goes wrong.

More to the point, such a list could lead to participants asking some very direct questions regarding the motivation of these firms – why are they not committed to upholding best practice? I, for one, would be very interested in the answer, for it strikes me that the majority of market participants didn’t need to change much as the majority of the work had been done over the past couple of years as they responded to the chat room scandal amongst other things, so it’s hardly a matter of resources.

Of course, the wonderfully cynical nature of the FX markets means I already have people complaining about firms that have signed the SoC – and registered it – who are apparently behaving badly. As always, such accusations come with a pinch of salt, for alongside cynicism, the FX industry does like a good moan, but there is a serious question here – will a signature on a piece of paper deter miscreants or, worse still, an institution, from putting commercial interests ahead of the client?

Such an instance will, to me, be the first real test of the Code – how will the industry react when a serious breach is detected and reported. Does the market ostracise the firm concerned if it is indeed a cultural or systemic issue at that firm (I think we all have to accept that the odd rogue individual will slip through the net)?

If it doesn’t, or if a small number of participants continue to embrace trading with that firm, then what does this say about the FX industry’s view of the Code – that it is a good thing until it impacts the bottom line? That’s not a good look, but as always with voluntary codes, it is a risk.

It probably depends upon the seriousness of the breach and here’s another idea for a register – one that logs instances of breaches. On one hand this may deter an institution from self-reporting a breach in case they accumulate several and get a reputation, but on the other it is the most transparent of processes – and to repeat, the Code is very much about transparency of action, rather than transparency of market (on which it makes no comment).

It is important to understand that not all breaches will be the same – some will be accidental or will reveal a loophole in the Code’s recommendations, others could be more deliberate – such as a firm having multiple connections to an ECN in breach of that venue’s rules. It is the latter that we need to focus on, instances where firms deliberately flaunt the guidelines or rules. If the breach is accidental or the action of a rogue individual, the chances are the institution will self report – which should be encouraged, and viewed more benevolently.

It is not only about market participants, however, for there is a lot of talk of greater responsibility on the part of the platform industry, few of whose participants seem willing to embrace the role. If a participant breaches a platform’s rules that surely there is a responsibility of that platform to report it?

This is also an issue for prime brokers, for as was pointed out to me this week, many firms are signing the SoC in the name of their global markets business, of which PB may not be a part. Just as it is difficult for platform providers to monitor activity outside of their own domain, so PBs can only look so far into a client’s business structure and activities. I can easily imagine the scene when the subject turns to the PB division signing a Statement of Commitment – the lawyers will turn purple, stress the business and reputational risk, and very quietly drop the subject.

There is a case, however, for introducing proportionality to breaches of the Code, so that if a breach is deliberate and serious, then the platform provider or the prime broker will know it – and thereby have a duty of reporting it. Sadly, the days when a quiet word could be had with a senior member of the offending firm are long gone, the current environment doesn’t make that a sensible risk to take, so the answer is report – and it can become public at some stage, if necessary, after an investigation has proven the breach.

So to me then, the Code has advanced to the stage where we need to start taking a bottom up approach to it. We have the majority of participants signed up, let’s focus on those who have not. Equally, we have established a baseline for conduct, so we need to start targeting firms who breach that threshold.

If serious breaches and non-adherents can be identified, and any miscreants effectively ostracised from the market, the FX industry will be showing it is doing more than paying lip service to best practice. It will also, crucially, demonstrate to one and all that the Statement of Commitment is not just a piece of paper with a signature on it.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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