This week sees the Global FX Committee meet in Sydney for a meeting that is largely going to focus on the subject matter for the first three-year review of the FX Global Code. I will be very surprised if the key themes for the review are not buy side engagement, disclosures, anonymous trading and certain trading practices like cover and deal, however I am starting to wonder if we should not adjust this list and take another look at the priorities?

To me the most important issues facing the FX industry remain around the execution piece – I am confident that the relationship piece of the puzzle is solved and merely needs monitoring, and while I am on the subject of market colour my thanks to those of you who responded to last Monday’s column I doubt I have ever had a greater reaction to anything I have written.

Back to this week’s meeting, though, and my argument of the need to prioritise the execution piece. It is here that two big issues I have focused on this year – last look and managing execution risk – lie.

As far as the latter is concerned I think there needs to be more transparency around who is responsible for market impact around the use of algos. Customers are increasingly using a bank-provided algo strategy via a third-party platform and I believe we could do with guidance around who is responsible for excess slippage and market impact. On one hand it could be a client seeking to create market impact, on the other it could the too lax parameters on the part of the provider. Either way, it would be good to nip in the bud any issues likely to arise from an execution going wrong.

That is predominantly a disclosure issue – the need to make it clear to providers that have evolved in a world in which the client is given everything and operates conscience free, that at some stage they need to ensure those clients are aware they are actually responsible for market risk – but I think it needs to be more overt than the current likely practice of sales people selling an algo suite by highlighting the functionality and relegating market risk to the small print.

Last look is also a big issue for me, especially the problem I highlighted earlier this year of LPs deploying it asymmetrically in terms of response and hold times. I continue to believe the GFXC has generally done a good job since formation, however the last couple of years appear to have seen it tread water on the big issues, including last look. This may be unfair because there are undoubtedly entrenched interests in this most emotive of subjects, but with the review coming up surely now is the time to tackle the issue head on?

If participants are unwilling to engage then their opposition should be made public – along with their reasons for that reluctance to play ball. This need not be a witch hunt, many clients are OK with last look, but it would at least provide no doubt as to where and why the opposition to evolving the practice stands. I stand by my argument that if an LP holds certain flow longer than the average (or longer than their technical abilities dictate) then the recipient of that longer hold time should be told. It need not be public, but the counterparty should be told because not only would it largely eradicate the practice coming back to bite the LP legally but it would also highlight to the client that their trading style is viewed as unacceptable by that LP (and probably many others).

This is absolutely about transparency of action – the bedrock of the Code – and to not declare such a practice, indeed to provide inadequate disclosures is anathema to the ethos the industry is trying to establish. Some players tell me their full disclosures to clients are much fuller than those published, which begs the question – as it does of those buy side firms that have purportedly signed a Statement of Commitment but not published it anywhere – what are you trying to hide? That you’re a good market citizen? Why would a firm want to obscure that fact? It simply doesn’t make sense and, frankly, doesn’t stand scrutiny in today’s cynical, suspicious world.

Anonymous trading is the other execution piece that has not yet been solved, largely I suspect due to the complexity of the issue, so I very much expect this to be part of the review and again, I hope that the need for responsibility is a key finding of the review. This responsibility lies with everyone but most pertinently the platform operators. I do not buy the line about how they can’t control what goes on in the wider market – they are not being asked to do that. What is required is for these operators to monitor activity and report anything that looks vaguely suspicious. Of course that would involve the equivalent of turkeys voting for Christmas so I doubt it will be achieved, but the pressure should be maintained.

The sell side also has a role to play in this by ensuring that they don’t abuse last look in such an environment and that they are open with the platforms about how they are operating and managing the flow they receive. Equally, the buy side needs to be more open about how they execute – what strategies are they using and how many platforms do they normally execute across being two examples.

On the subject of the buy side, this is one area where, while I expect it to be an issue in the review, I am not sure it should be. It is becoming clearer by the month that certain elements of the buy side are not interested in signing up to the Global Code. Perhaps they are concerned about the level of responsibility that comes with such an action, or perhaps they honestly do not believe they have a case to answer – either way I am starting to very seriously doubt that more words, explanations and encouragement will make an impression.

As this intransigence continues perhaps the market needs to make a bold move to demonstrate how it will not tolerate buy side neglect of the Code. I fully accept the issues that led to the Code’s creation were perpetrated on the sell side, but who was it pushing banks to lower their fees for the Fix? Who is it who sprays the market when executing trades, sometimes after telling each LP “only you”? And who is it who used to, as I noted last week, demand market colour that went beyond the grounds of acceptability, or who, for years, chose to ignore how and when their trades were executed?

The buy side, especially as market risk moves in that direction, needs to be dragged screaming and kicking to the Global Code table but I am starting to think that only the LPs will be able to do it. The platforms are still wrapped up in how important the buy side is to them, but as more LPs deploy analytical tools to measure the value of that flow then that argument may be diluted. I would not be at all surprised to find out that those firms most reluctant to sign up to the Code are those from whom the LPs make the least money (if they make money at all), so perhaps the LPs need to wield their most potent weapon – the liquidity they provide – to force clients to the table. No Statement of Commitment, no bilateral or premium level pricing. A year ago even such an approach would have been viewed as unthinkable, but as we have seen, 2019 is rapidly becoming the year in which the unthinkable is though, so it cannot, and should not, be ruled out.

So there is much for the GFXC to consider and it will be interesting to see what, of if, they prioritise – there are only so many resources at its disposal. To me though, the key is getting the execution piece settled – that is how we future proof the industry from legal action for all but the most egregious practices. To do this will involve making some tough decisions that apparently fly in the face of conventional wisdom, but made they must be.

It should not actually be that hard, however, for the bottom line is that this actually goes back to one of the statements made at the launch of the FX Global Code – that central banks would not deal with non-signatories and membership of local FX committees was dependent upon signing a Statement of Commitment. Perhaps now is the time to filter that further down the industry and start to play real hard ball? The talking hasn’t worked and as anyone can tell you – actions speak louder than words.

Twitter @lamboPnL

Colin Lambert

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