Today’s column is dedicated to the Swiss National Bank for its ineptness five years ago yesterday, which changed the foreign exchange industry forever and gave this column literally months worth of ammunition. The SNB is a signatory to the FX Global Code, so given the guidance on disruptive actions, I wonder how it would handle a de-pegging today?

Hopefully it would start by putting in protective bids to stop the ensuing carnage, but I digress because today I do want to talk about the FX Global Code given the frisson of excitement that ran through that portion of our community that likes such things, when the Global Index of Public Registers for Statements of Commitment to the Code reached the 1,000 mark this week.

I believe the 1,000th entry was Raiffeisen Bank International and with all due disrespect to that institution I have to confess to feeling a little disappointed that the bank could not have gone a few days earlier because then, for those of us that like symbolism, the Peoples Bank of China would have been signatory number 1,000 instead of 999.

1,000 is just a number of course and it has to be pointed out, as critics of the Code are apt to do, that there are a lot of multiple entries to the registers, either in the form of different parts of the same company or the same business posting to multiple registers. I had a flick through the register and came up with something like 572 individual or umbrella organisations – that is still a decent number.

I know that advocates of the Code are keen to point out that plenty of firms have a Statement but haven’t posted it publicly, and that’s fine, because I am keen to point out to them that such an approach goes against the transparency ethos of the Code and is about as much use to the industry as I am as a spokesperson for Weightwatchers!

The other big stick critics use to beat the Code with is the lack of buy side take up and again, a glance through the register suggests there are 74 unique statements of commitment from what would be termed buy side, the vast majority, it has to be said, from the asset management industry (both private and bank-owned). I got above 50 asset manager type firms when trying to count them up, but more pertinently I noted that in the last three months, 11 unique buy side firms have posted a statement to a register. To put that into perspective, that is about 13% of the firms registered being buy side, compared to that segment executing something in the region of 29% of all FX business daily – it’s a decent covering, but could be better.

This suggests that the outreach effort of the GFXC is starting to gain some traction, which must be heartening for those responsible – it also suggests that the more proactive approach on the part of central banks to call up the CEOs of asset managers in particular to ask why they have not signed up, could also be paying off. There is still, of course, work to be done in the asset manager segment, but it does seem as though even those firms who were reluctant to sign up due to misgivings over guidance around areas such as last look, have decided there is a benefit in being shown to be a good market citizen.

So things are progressing nicely it seems (the same has to be hoped for the working groups’ efforts to solve disclosure issues), but that flick through the register did highlight one other glaring omission.

I reckon, looking through the register, there were less than 10 firms who would be classed as a hedge fund in some shape or form. Look at the big hedge funds out there, that have traditionally been very active in FX markets, they are notable by their absence. There is no AQR, Brevan Howard, Bridgewater, Man Group, Moore Capital, Renaissance or Tudor Jones to name just a few and there are countless others of course.

A few years ago this would have been seen as a serious problem, more so than the asset managers not signing up, and in truth the industry should be concerned about it now – given the number of hedge funds active in FX, the numbers should be much higher. The problem is, for whatever reason (and the cynics amongst us can identify a few key issues) these firms are showing no inclination to sign up.

So this could be a problem for the industry that a big segment is still shunning the Code – but is it? Could it not also be a reflection of how far the hedge fund star has fallen in FX markets that people aren’t caring? We have seen some funds return money to investors to make their business more manageable, but more importantly we have seen the rise of analytics that helps the LPs say to these funds ‘thanks, but no thanks” when it comes to their business. The LPs are happier to see these firms on the public platforms when they can deal on their terms, which means the LPs care less about them and as such are less inclined to question the hedge funds’ absence from the registers (and how many platforms are going to push a buy side name for such a move?)

There is no doubt that the execution practices of some hedge funds do not stand up to the scrutiny of the Code and while some are actively working with their LPs to find a happy medium that allows best execution but doesn’t leave the LP feeling like they’ve just been hit by a runaway train (for the third time that week!), others have their heads in the sand. I still have salespeople tell me of hedge funds persisting in pushing the tired old line that is something akin to “if you don’t quote me choice in a couple of hundred you won’t see any business”.

That attitude belongs in the last century, but there is little doubt that in FX markets it is becoming harder and harder for some hedge funds to operate the way they have traditionally – analytical skills and resources are ensuring that. As these businesses evolve (or, in FX terms, die) it will be interesting to see if their attitude to the Code changes. More pertinently, I wonder if, when they do approach the LPs to try to talk them into accepting their business, the latter will use the lack of adherence to the Code as another reason not to allow them access to their premium streams? They can point to the data highlighting how much money it costs them to quote, but they would also achieve some moral upper hand if they can also point out that the hedge fund in question has not agreed to be a good market citizen.

While the trend seems to be positive in terms of getting the asset manager community on board, therefore, the story is very different with the hedge fund community. Looking at the two schools of thought as to why this is, I tend to the argument that the segment is becoming less relevant. It will not always be that way of course, and there are many hedge funds who operate in a perfectly acceptable manner when trading FX today, but the sense is that the big wins at the moment are the asset managers and therefore it makes sense for the GFXC to target that group.

Going forward, however, that could well change and while there will be time to engage the hedge fund community – and hopefully the LPs will lead the way – one cannot escape the thought that without getting this community onboard the Code will struggle to get anywhere close 1,000 institutions signed up, and while this week’s milestone is laudable, 1,000 institutions would be a real achievement.

So as far as the Code is concerned in terms of adoption, I would suggest that the industry has just about finished picking the low hanging fruit – and as such the real stretch starts here.

Twitter @lamboPnL

Colin Lambert

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