As part of its report on disclosures and transparency, the Global Foreign Exchange Committee (GFXC) has unveiled some initial views on a second stream of work by its disclosures working group on practices in the anonymous e-trading platform sector.
The work centred on the knowledge of counterparties and expectations around counterparty behaviour, although the report does note that given that the landscape of e-trading platforms is diverse with different features and business models across infrastructure providers and users, the working group will continue work to consider this portion of the disclosure landscape. It adds that it has identified potential topics for ongoing work on e-trading platforms such as providing general examples of flow of information, describing the various capacities in which market participants can act, discussing various ways that they can provide and appropriately seek out information about behavior and engagement of counterparties.
During the development of the FX Global Code and the request for feedback on last look practices, the GFXC says that market participants highlighted a number of perceived challenges to understanding aspects of trading capacities and behaviors on anonymous e-trading platforms. It adds that in light of this feedback and with the diverse landscape of e-trading platforms in mind, the working group discussed various aspects of the platform landscape and highlighted some key areas and topics.
The report says that some platforms offer the ability to trade anonymously with client names only visible post-trade. “This can pose limitations to understanding the flow of information across and amongst parties at various stages of the transaction lifecycle,” the report states. “The landscape of e-trading platforms is diverse and so there is not one general flow of information.
“Such limitations become more complex when considering market participants that engage on an anonymous platform through a prime broker, where the credit relationship between two participants may differ from the trading and behavioral relationship,” the report adds.
The report also observes that some platforms issue “tags” which provide information around the identity of a counterparty. “The practice of issuing such tags, and the process for assigning new tags, could be more widely understood,” the report says, adding that more generally, a key question is whether participants understand the circumstances and the degree of information that is being disclosed about them to counterparties.
A second theme identified in the initial process looks at expectations around counterparty behaviour, which notes. “Overall, it may be more difficult for users of anonymous e-trading platforms to convey expectations regarding counterparty behavior because of the anonymous nature of those venues.”
It adds that it is important for participants to understand trading practices on anonymous platforms, in order to be able to evaluate the actual behaviour taking place. “Accordingly, such trading practices could be provided by the platform itself, for example through a rule book or other material,” the report states. “These topics could include but are not limited to last look practices, description of the matching process and policies on information use.”
In order to develop what it terms a better understanding of the issues described in the report and to support the GFXC objective to promote an appropriately transparent FX market, the working groups says it now proposes to conduct further work to enhance understanding of the complexities around engagement on these platforms and support greater understanding how the FX Global Code’s recommendations regarding disclosure and transparency can be applied to anonymous trading.
“In doing this, it will be important to keep in mind that some market participants may use anonymous e-trading platforms precisely because of the anonymity they provide,” the report says. “It is ultimately up to each market participant to determine how to balance anonymity and information exchange in order to achieve its business objectives.”
The working group envisages the next stage of work to include focus on providing general examples of flow of information on an platform, keeping the diverse landscape in mind, and describing the various capacities in which participants can act on the platform and the difference between interacting with a counterparty from a credit perspective and a behavioural perspective. It will also discuss various ways that participants can provide and appropriately seek out information about behaviour and engagement on the platforms, while considering the business models offered and their purpose; and finally highlight important topics that participants should be aware of when engaging on a platform such as the latter’s rules, the role of “tags” or other policies like the trade matching process.