The Global Foreign Exchange Committee (GFXC) at its meeting in Sydney this week established five areas of focus for its work to maintain the FX Global Code, with algo execution and transaction cost analysis (TCA) being added to the existing workstreams around buy side outreach, disclosures, anonymous trading and execution principles.

According to GFXC chair Guy Debelle, the GFXC agreed that the increasing usage of algorithmic execution in FX markets warranted a review of the Code’s existing guidance in this area. It was also decided to consider how guidance around TCA could be incorporated into the Code. The likely shape of the guidance would be around how the algos function, GFXC co-vice chair Akira Hoshino says, adding, “It will very much be about what to consider before using an algo and what the control framework looks like.”

The five areas of focus were arrived at following an extensive industry survey taken by the GFXC earlier this year – the results of which will be published early in the new year. Reinforcing what appears to be the general mood of the GFXC, co-vice chair Neill Penney told reporters on a call that two-thirds of respondents to the survey believed the Code needed no adjustment. As Debelle told Profit & Loss earlier this year, the intention of next year’s three-year review is to establish areas in need of adjustment rather than a wholesale overhaul of the Code which remains, he reiterates, “fit for purpose”.

In terms of the areas highlighted by the survey respondents, Debelle, Penney and Hoshino, say that buy side outreach was the overriding theme of the survey feedback, followed by anonymous trading and algos – they add that the voices for adjustment to the execution principles, specifically around last look and pre-hedging, were a “vocal minority”.

On the subject of buy side outreach, which has been an ongoing focus of the GFXC for two years now, Debelle says that the working group formed by the GFXC will continue its efforts as it recognises that further work remains to be done to gain greater adherence to the Code amongst the buy side. “There were several suggestions as to how this work will progress,” he says. “Local FX committees have been leading the way in reaching out to their local buy side participants and in some cases central banks have called the large buy side CEOs to ask them why they haven’t adopted the Code and there has been quite a good response to that, which can hopefully help us gain traction.

“We will also publish case studies that highlight the benefits of the Code to buy side firms, as well as work on lowering the barriers to adoption,” he adds. “Although I think there have already been some successes, for example around information sharing where I think the Code has improved market functioning.”

Penney acknowledges that it is more complicated for the buy side to adopt the Code than the sell side, however he argues that the proportionality that has always been a bedrock of the Code can help. “If we can highlight to different buy side firms the principles that most apply to their business, that can ease the burden of adoption and allow them to focus on the most important areas,” he says.

The GFXC’s working group on disclosures presented its work on anonymous trading platforms to the meeting, highlighting several areas where additional guidance in the Code might be appropriate. This includes usage of ‘tags’ (unique identifiers) and the roles and responsibilities of the different market participants, including prime brokers. A report describing the anonymous e-trading landscape will be published by the GFXC in the New Year.

On the broader theme of disclosures, the committee acknowledged that the clarity and adequacy of some elements of disclosures made by market participants remained an issue, as shown by the survey results and other market feedback. The GFXC had published supplemental material aimed at strengthening the disclosure landscape in February 2019, but adoption so far appeared slow, therefore a working group will be set up to focus on ways to accelerate the adoption of more effective disclosures.

Although Debelle notes that a small majority of respondents to the GFXC survey believed that market functioning was unchanged as a result of the Code, the GFXC appears more upbeat. “Reject rates are down generally and behaviour on platforms has improved,” says Hoshino. “That is largely thanks to the Code. The market is also thinking more around disclosures generally, which is a positive development.”

The GFXC will issue a series of reports from its working groups in the new year and Debelle says that the GFXC will have concrete ideas before the next meeting scheduled for Zurich in mid-2020 as to what the new guidance on algos will look like, as well as how well the other work streams are progressing.

Colin Lambert

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