At their recent joint meeting in Tokyo, the global FX committees agreed and released new guidance for market participants, as Colin Lambert reports.
With conduct so high on the FX industry’s agenda, representatives of the eight global FX committees met in Tokyo in late March to agree upon a combined global code of conduct for the industry, providing additional guidance around key topics such as sharing market colour and use of trading jargon.
The document supersedes the Codes of Best Market Practice and Shared Global Principles published by the various Foreign Exchange Committees in 2013, and was formally endorsed at the Tokyo meeting.
The document says that FX market participants are expected to review and incorporate the updated guidelines into their individual firm’s policies and procedures. “These policies should provide sufficient guidance, including examples where appropriate, for staff to be able to distinguish between acceptable and unacceptable conduct in a variety of situations they may encounter,” the document states. “In order to raise awareness and compliance by relevant personnel with the FX policies, a program should be established for the training of such personnel on the FX policies.
“FX market participants should also consider, as appropriate, adopting a process by which relevant managers periodically attest to the supervision of their staff with respect to compliance with the FX policies,” it adds.
The FX committees involved in the work are the Australian Foreign Exchange Committee, Canadian Foreign Exchange Committee, the European Central Bank’s Foreign Exchange Contact Group, the Hong Kong Treasury Markets Association, the UK Foreign Exchange Joint Standing Committee, the New York Foreign Exchange Committee, the Singapore Foreign Exchange Market Committee, and the Tokyo Foreign Exchange Market Committee.
These bodies work closely with each other to share information on various local projects and initiatives and to exchange views on events in the foreign exchange industry. The new document states, “In order to promote more robust risk management practices among global FX market participants, there is shared support for certain high-level principles which are set out in this document and underpin the existing codes (and the guidance therein) promulgated by the various committees.”
The new guidelines include the demand to develop and promote a strong culture of ethical behaviour and standards of conduct; promote awareness and use of general dealing practices, procedures and conventions; ensure accurate and timely pre-trade preparation and trade capture; support robust and efficient back office operations including confirmation, netting, payment and settlement; and mitigate risk in FX transactions from the point of initial discussion regarding a potential transaction to settlement.
The document lays out recommendations for personal conduct amongst all participants, and stresses that any market participant and their institution “may be held accountable for any breach of FX policies that violate fair market practices, damage the reputation of the FX market participant and profession or undermine the integrity of the FX market”.
It also states that participants must have effective policies and controls in place to deal with individuals who have behaved inappropriately, including reporting requirements to local authorities.
Escalation procedures should be in place to allow individuals to report suspicious behaviour, and “Individuals working for FX market participants should feel confident that any information reported under these procedures will be dealt with seriously and effectively, and that the reporting will not be to their detriment. FX market participants should be accountable for the integrity of these policies and for ensuring the protection of staff that make such reports,” the document states.
On the crucial subject of confidentiality, the document says that market participants must have well documented policies and procedures in place, as well as sufficient systems and controls to protect FX trading information within the dealing environment and other areas of the market participant which may obtain such information.
They should also ensure that personnel have been trained with respect to such policies. These policies should also prohibit counterparty and customer anonymity from being circumvented through the use of slang or pseudonyms, both externally and internally.
It also says institutions’ personnel should be trained to identify designated confidential information appropriately in accordance with internal policies and procedures including the manner in which such information must be handled, and to deal appropriately with situations that require anonymity and discretion.
The participants should also ensure the communication technologies used to transmit trading information and designated confidential information are reasonably designed to be secure, monitored and protected against unauthorised access. “Appropriate steps should be taken to prevent the leakage of such information through various kinds of communication technologies,” it states, adding that any misuse of trading information or designated confidential information should be investigated promptly according to a properly documented internal procedure.
“FX market participants should not share information with each other about their trading positions or individual trades with clients or other FX market participants beyond that necessary for the execution of a transaction and subsequent transaction lifecycle events, ensuring that no confidential information is disclosed,” the document states. “Furthermore, FX market participants should not pass on FX trading information to other FX market participants that might enable those entities to anticipate the flows of a specific client or counterparty, including around a fix.
“It is acceptable to share with customers a view on the general state of and trends in the market (often referred to as providing market colour),” the document continues. “However, any market colour given regarding market activity should be sufficiently aggregated and anonymised so as to not disclose FX trading information or designated confidential information.
“It is not acceptable to disclose information on individual trades, specific counterparty names and other non-public information, except in accordance with the standards set out above regarding FX trading information or designated confidential information,” it adds. “Finally, FX market participants should exercise careful judgment in assessing whether any information they receive (including, but not exclusive to, counterparty information) is true and accurate.”
The committees state that institutions should impose policies that require their personnel to refrain from passing on information that they know or suspect to be misleading. These policies should also include the circumstances in which it may be acceptable to inform customers about a rumour prevalent in the market, and the requirements as to how that communication should be handled.
On execution policies, the document stresses that participants should not engage in any practices “which could be held to constitute market manipulation, abuse, fraud or anti-competitive behaviour”. It adds that all firms should identify potential or actual conflicts of interest and take measures to eliminate or control these conflicts.
The document concludes, “In accordance with the FSB’s Foreign Exchange Benchmarks Report’s recommendations, FX market participants should establish and enforce their internal guidelines and procedures for collecting and executing fixing orders. If a firm engages in fixing transactions, those transactions should be priced in a manner that is transparent and is consistent with the risk borne in accepting such transactions. Finally, FX customers (including asset managers passively tracking an index) should conduct appropriate due diligence around their foreign exchange execution, including assessing the suitability of FX reference rates used, and be able to demonstrate that to their own clients if requested.”
The guidelines are intended to sit on top of the existing global codes provided by the various committees. The committees stress that the new guidelines are intended to provide a harmonised, global view of the top level principles and do not replace the individual codes established and adopted by the various local committees. The FX committees of Hong Kong, London, New York and Singapore have their own codes, while the Australian and European Central Bank Contact Group endorse the ACI Model Code.