In an open letter to Global FX Committee (GFXC) chair Guy Debelle, the head of the Bank for International Settlements’ (BIS) Markets Committee, Jacqueline Loh, has called for greater adoption of the FX Global Code, especially amongst asset managers. Ahead of the first three-year review of the Code, the letter also urges the GFXC to strengthen its contents by improving the transparency and disclosure of trading practices on anonymous trading and algorithmic trading platforms.

While crystalising the thoughts of the Markets Committee and highlighting senior central bankers’ backing for the Code, the areas for strengthening listed in the letter are already the subject of working groups of the GFXC.

The letter summarises the key takeaways of an assessment of the Code’s effectiveness, as conducted by the Markets Committee at the request of governors of the BIS Global Economy Meeting (GEM), the chair of which, Bank of England governor Mark Carney, says, “Since the Code’s launch, a lot has been accomplished. It has become a benchmark for FX-related issues and has helped to improve standards of behaviour in FX markets. The GEM Governors look forward to the GFXC’s review, which will help ensure the Code remains relevant and dynamic.”

The scope of the assessment by the Markets Committee included a study of the breadth of Code adoption; the effectiveness of adherence mechanisms; and effect of the Code on market behaviours and market functioning. It also included findings from the GFXC’s surveys of market participants and other market information, as well as discussions at its own meetings.

“For the Code to be successful, it is vital that market participants from all segments recognise that adherence to the Code is an implicit part of their participation in the global FX market,” writes Loh. “An important tool to publicly demonstrate adherence to the Code is the Statement of Commitment (SoC). Since the launch of the Code, we are encouraged to have seen a significant and growing number of market participants adopting the Code and publishing their SoC on the Global Index of Public Registers (Global Index), which is on the GFXC website.

“Another positive development has been the expansion of the GFXC membership, with 10 new local foreign exchange committees being established since the launch of the Code,” she continues. “The GFXC membership represents a major portion of global FX turnover, which will support the GFXC’s outreach efforts in getting more market participants to embrace, adopt and adhere to the Code. The Code has also become the “de facto reference or focal point” for FX-related issues, and has featured prominently in industry conferences and journals.”

Loh also acknowledges that adherence to the Code has been helped by the launch of public registers for SoCs as well by the publication of educational and guidance material on the GFXC website and the provision of training and consultancy services by the market. “In the process, an industry ecosystem centred on the Code has been created, which has helped to shift mindsets on improving behaviour in the FX market as the Code becomes increasingly embedded in the FX market,” Loh writes, adding, “We also acknowledge that the effect of the Code on market behaviour has been broadly positive based on market feedback and takeaways from the GFXC annual surveys.”

As noted, however, the letter also highlights “areas for improvement”, most notably the “fraction” of buy side firms such as asset managers to adopt the Code. “As their share in global FX trading increases further, it is important that they adopt the Code to ensure a fair and effective FX market for all,” Loh writes. “To that end, while the GFXC has been actively encouraging buy-side adoption through various initiatives, it could explore additional ways to further embed the Code, e.g. to mobilise public authorities and market participants to make the case for signing up at the most senior levels of buy-side firms. The GFXC could also explore enhancements of existing adherence mechanisms, such as by providing increased clarity on the principle of proportionality.”

Another area of focus for the Markets Committee was the transparency and disclosure of trading practices on anonymous trading platforms and of the roles and responsibilities of different market participants, including prime brokers, which, Loh states, “can be further improved”, adding that guidance relating to disclosures on algorithmic trading or aggregation services can also be enhanced in terms of their breadth, quality and consistency.

“For the Code to have its intended effect, the GFXC and local FXCs should continue to strengthen their engagement with market participants, e.g. through industry outreach events, the annual GFXC surveys, and tailored content such as webinars, to facilitate the GFXC’s communication and enhance the Code’s standing in the FX market,” Loh writes. “Furthermore, the GFXC should remain forward-looking in considering future adjustments and additions to the Code, while taking into account the burden imposed on the market. This will be helpful in reflecting the changing FX market landscape and market behaviours to ensure that the Code continues to be a relevant and dynamic platform on which to discuss evolving issues.

“We look forward to the GFXC’s review of the Code in 2020,” she concludes. “Good market practices benefit both the individual institution and the FX market as a whole. We strongly believe that the Code will continue to play an important role in shifting mindsets and enhancing market behaviours and market functioning.”

Colin Lambert

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