I really don’t like complacency – it’s been at the heart of so many problems in the FX industry over the past decade or so. Therefore, it is vital, in my opinion, that the FX industry does not become complacent about the FX Global Code.
I can already hear some readers proclaiming this will never be the case, but by assuming this stance, they are already sounding complacent! It is significant to me that so many conversations I have about one aspect or another of the modern FX market involves someone saying, “…but we’ve solved that with the Global Code.”
We have solved a lot of potential problems with the Code, but it can only be a success and have a lasting impact if focus and momentum are maintained.
Another ingredient of complacency is something that reflects broader societal tenets – the idea that this is the first time we have ever done something. The FX Global Code is not the first attempt to create a set of guidelines – it is not even the first to be created by a group of banks, brokers, central bankers and buy side firms. We have been here before and it’s important that we, as an industry, remember that.
I raise this issue not only because of the aforementioned widespread belief that the Code is a panacea, but also because a friend got in touch last week to discuss recent columns on this issue – and in the process of so doing, shared a few lines of ACI’s Model Code, which was, of course, one of the Codes I referred to earlier as being a predecessor for the Global Code.
Just a couple of lines highlight my friend’s case. “Both dealers and brokers are privy to highly confidential information. In order to preserve a reputable market, it is essential that strict standards of confidentiality are maintained and that all market participants exercise great care during the course of conversations which may be overheard or read through modern communications systems or in the public domain.”
Secondly, “In the normal course of business, dealers and sales staff are often entrusted with proprietary and materially price-sensitive information by their management, clients and counterparties. To disclose such confidential information to unrelated parties – and, in some cases, to related parties – without consent before it becomes public is unethical and a breach of confidentiality. It may also violate local data protection law. Dealing in financial instruments based on confidential information about the issuer of such instruments or the instruments themselves constitutes ‘insider dealing’ and possibly ‘market abuse’. Insider dealing is a criminal offence in many countries.”
The first principle quoted above deals in general confidentiality, and stresses the importance of not sharing information in any environment or via any communication means. The second, which deals with the use of confidential information, also highlights the importance of segregated order information and the use of appropriate oversight.
If that wasn’t enough, my friend further points out this version of the Model Code also stated, “Notwithstanding the provisions contained in Chapter II (6) of this code, neither principals nor clients should divulge to third parties the nature or conditions of transactions being negotiated, discussed or traded with each other. Where a client is in the process of negotiating a specific or specially designed or individually tailored product or strategy with its bank, the technical details of the business under negotiation should not be divulged to any third party.”
I think that is all pretty clear and unambiguous. The thing is though, it was in the 2007 version of the Model Code.
In other words, right at the time when it seems as though the improper sharing of information was ramping up, the industry had guidance over best practices, and largely chose to ignore it. Obviously one can make the argument that ACI did not have enough penetration or influence among the top echelon of FX banks back then, but the principles of this code were reflected elsewhere in central bank codes of conduct – and several parties, at institutional and individual level, seemed to care less.
At some level at least, this was complacency – largely on the part of senior management – and it was reinforced every time an update to the Model Code or its peers was released. Pretty much as an industry we chose to ignore what was widely agreed as best practice, largely, in my view, as a result of the desperate and ultimately discredited grab for market share at any cost.
So there is a lesson in history when it comes to our industry’s ability (or lack of it) to maintain focus on standards and it is beholden upon everyone to ensure the latest attempt does not wither and die. It is unfortunate for a few individuals that they find themselves facing prosecutors and jurors over their conduct but if there is one silver lining in all this, it is that these actions must have got the attention of modern day market participants.
It is a tricky and sensitive subject, because some of you will find it disagreeable for someone who did bring the industry into disrepute (for whatever reason) to profit from their experience, but I suspect that the FX industry could use some input from, amongst others, members of the Cartel. Yes, they were acquitted, but one assumes the past couple of years have not been a good experience for them and that they went through a tremendous amount of stress and strain.
If that is the case, is there an argument that every generation in the FX industry going forward could benefit from listening to these former traders’ experience? We have the Code, but history shows society’s fallibility when it comes to remembering previous experience and the FX industry is no different. If it is reinforced by the sharing of the stark and possibly frightening experience regarding what it feels like to be facing jail because guidelines were not followed or enforced, this approach may grab future generations’ attention sufficiently to ensure we don’t have a major scandal again.