The agenda established by the Global Foreign Exchange Committee for the focus of the impending three-year review of the FX Global Code was not expected to surprise – and it didn’t. As I argued in Monday’s column the key factors in need of discussion and review largely surround execution – although I have to acknowledge that clearly a majority of the industry don’t agree with me when I suggest we give up on the buy side adoption campaign and just quote different prices for adopters and abstainers!
My overall impression from a press call following the first day of the meeting was positive – there seems to be a renewed sense of purpose from the GFXC that it had maybe lost over the past year. Although that apparent drift could just be a function of the time it takes to deliver on projects, the admission by the GFXC itself that the buy side outreach programme had not achieved its desired goals probably backs up my initial impression.
Now though, there appears to be a real desire to move things along; from the direct calls to the CEOs of big buy side firms to the workstream on algos and TCA, things are happening, although I still have a few doubts about exactly how successful the buy side outreach will be – it’s one thing a European or Asian central bank talking to the buy side about adoption of the Code, that outreach appears to be much harder when it comes to the US.
One comment from this week’s press call supports my optimism, when co-vice chair Neill Penney told reporters that the broader outreach of the GFXC had to change, specifically, it should no longer be driven by the number of firms signing up. Obviously there is the fact that a natural slowdown in adoption will, and has, occurred, thus the story has to change, however it was pleasing to hear a senior member of the committee hint at a concern that many in the industry have had that there has been too much focus on these numbers and not enough getting things done.
I ought to stress that the message from the GFXC remains unchanged, the Code is fit for purpose and does not need major changes – indeed the bar for change is very high. That is, in my view, the correct approach, however it does not mean that small, but important changes can’t be discussed and, potentially, made…which brings me to last look and disclosures.
In answer to a question it was pointed out that last look and pre-hedging were minor themes resulting from the latest survey of market participants, suggesting that everyone thinks where we stand is OK. I respectfully disagree – and to those respondents who think everything is fine with last look I can only observe that at one time the vast majority of the industry also thought it was OK to share information in Bloomberg chat rooms.
I still think there is a problem around disclosures and the use of last look in particular, but want to stress I don’t think this requires major surgery as one or two readers suggested I did earlier this week when I referred back to an earlier column on the subject. GFXC chair Guy Debelle has from the start of his incumbency in the chair expressed his concern over the caveat emptor nature of some disclosures, my thinking is an extension of that – there needs to be more detail around the use of last look and, I would argue, more detailed disclosures, especially to those players whose flow is treated differently to the norm.
During the press call it was noted that as part of the work around disclosures, aspects such as asymmetric hold and response times would be investigated – specifically should such practices form a necessary part of disclosures? I think I can speed things up for this particular workstream – yes they should!
The Code is very much about normalising accepted behaviours in foreign exchange markets and unlike a small majority of respondents to the survey (I will be interested to see what regions they come from after the last survey was heavily dominated by emerging markets players) I think it has improved market functioning significantly. Transparency of action is the bedrock of the Code and to me that means reporting to the client that their flow is subject to hold times that deviate from the norm. This doesn’t have to be a nasty conversation, it can be very factual and based upon data – the LP can tell the customer “your flow costs me money, therefore you are on a longer hold time”. The client can then make an informed decision as to whether to continue the relationship or, perhaps, whether they are happy for the LP to quote them wider, and they are in no doubt as to why the decision has been taken. LPs are not in the charity business and as the ongoing feedback to my column of November 25 highlights, they are slowly waking up to that fact!
Some readers have inferred in my columns that I see the need for radical change in the Code – I do not. The changes I believe should happen around last look and disclosures are relatively small and could come in the form of one or two sentences such as “The use of last look for commercial purposes is not best practice” or, “applying different hold times to certain customer flow and/or asymmetric responses on third party platforms should be disclosed to the counterparty”.
I do not see that as a major change and it does not reflect badly upon the original Code, it merely reflects the evolution of the market whereby LPs are finding different ways to (ahem) innovate around their use of technology.
Oh, and one more aspect for the buy side to ponder as they resist signing up to the Code; how many of their dealing managers have actually read the disclosures provide by LPs, let alone compared them? The Code recommends they do and it’s an important part of how their business could and should function; it could help them save important performance points (assuming they are not with the rest of the sheep in the benchmark pen) and, even more importantly, save them from the wrath of their investors when they find out they have not been doing all they could around their FX execution.
Overall then, I feel as though the GFXC has got it right – it has moved with the times and continues to work on the key challenges facing the industry. The plan is to have concrete ideas in place for what the guidance around algos and TCA will look like by the middle of next year, hopefully work will also have advanced on the other workstreams. If it has, the mood around the FX Global Code will be more positive and this will percolate through the industry.
The Code has always been intended, as we have been told from day one, to be a “living, breathing, document”, but there has been a sense in some quarters that while the patient wasn’t quite in intensive care, the prognosis wasn’t looking good. Hopefully I am correct in sensing an urgency and determination to move things along, if I am, then the result will not just be a healthy FX Global Code but a vibrant, full of life, foreign exchange market.