The Global Foreign Exchange Committee (GFXC) has published an updated FX Global Code incorporating revised guidance on trading in the last look window, known as Principle 17.
The revised Principle 17 states that market participants should not undertake trading activity that utilises information from the client’s trade request during the last look window. It also describes the conditions under which certain trading arrangements (sometimes referred to as ‘cover and deal’) may be distinguished from this guidance. Two related examples have also been added to the Annex. Further details are available in a paper published today by the GFXC on the Request for Feedback.
The new language states: “Last look is a practice utilised in Electronic Trading Activities whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price. Market Participants receiving trade requests that utilise the last look window should have in place governance and controls around its design and use, consistent with disclosed terms. This may include appropriate management and compliance oversight.
“A Market Participant should be transparent regarding its last look practices in order for the Client to understand and to be able to make an informed decision as to the manner in which last look is applied to their trading. The Market Participant should disclose, at a minimum, explanations regarding whether, and if so how, changes to price in either direction may impact the decision to accept or reject the trade, the expected or typical period of time for making that decision, and more broadly the purpose for using last look.
“If utilised, last look should be a risk control mechanism used in order to verify validity and/or price. The validity check should be intended to confirm that the transaction details contained in the request to trade are appropriate from an operational perspective and there is sufficient available credit to enter into the transaction contemplated by the trade request. The price check should be intended to confirm whether the price at which the trade request was made remains consistent with the current price that would be available to the Client.”
It continues, “In the context of last look, the Market Participant has sole discretion, based upon the validity and price check processes, over whether the Client’s trade request is accepted or not, leaving the Client with potential market risk in the event the trade request is not accepted. Accordingly, and consistent with related principles in the Global Code: Last look should not be used for purposes of information gathering with no intention to accept the Client’s request to trade; Confidential Information arises at the point the Market Participant receives a trade request at the start of the last look window, and use of such Confidential Information should be consistent with Principles 19 and 20 on Information Sharing; Market Participants should not conduct trading activity that utilises the information from the Client’s trade request during the last look window.
“Such trading activity would include (1) any pricing activity on e-trading platforms that incorporates information from the trade request and (2) any hedging activity that incorporates information from the trade request. Such activity would risk signalling to other Market Participants the Client’s trading intent and could move market prices against the Client. In the event that the Client’s trade requests were subsequently rejected, such trading activity could disadvantage the Client.”
Importantly, and reflecting the queries raised during the feedback process, the Global Code now further states: “This guidance does not apply to an arrangement that features all of the following characteristics:
1. An explicit understanding that the Market Participant will fill the Client’s trade request without taking on market risk in connection with the trade request by first entering into offsetting transactions in the market.
2. The volume traded in the last look window will be passed on to the Client in its entirety.
3. This understanding is appropriately documented and disclosed to the Client.
It continues, “It is good practice for Market Participants to be available to engage in a dialogue with Clients regarding how their trade requests have been handled, including the appropriate treatment of information associated with those trade requests. Such dialogue could include metrics that facilitate transparency around the pricing and execution of the Client’s trade requests and assist a Client in evaluating the handling of its trade requests in order to evaluate whether the execution methodology continues to meet its needs over time.
“The revised guidance on last look demonstrates that the GFXC is committed to ensuring the FX Global Code keeps pace with a fast evolving market,” says Chris Salmon, chair of the GFXC. “This will support our objective of improving market practice and rebuilding trust in the FX market. With the last look consultation completed, the priority for the first half of 2018 is to promote widespread commitment to the Code.”
David Puth, vice-chair of the GFXC and CEO of CLS, add, “Since the launch of the Code in May, the GFXC has been working to resolve outstanding issues and consistently identify new areas of focus to ensure that the principles evolve seamlessly with good market practice. In this instance we received meaningful market feedback to which the GFXC responded appropriately and in a timely manner. Our focus will now shift to encouraging the broad adoption of the Code by all major market participants during the first half of 2018.”
The GFXC also agreed that it should continue to facilitate adoption of the Code as a global public good and members agreed to continue promoting the Code across all industry segments. The GFXC agreed to create a new associate member category to facilitate broad geographic adoption of the Code. It is also expected to form new sub-committees to look into certain areas of the Code, such as greater transparency around LP disclosures when they are acting on ECNs and other anonymous venues.
Separately, the GFXC has published minutes from the 14 November meeting and revised terms of reference to reflect changes designed to expand its global reach.
The new guidance was issued after the committee discussed the results of an extension consultation practice that ended in September.