The Global Foreign Exchange Committee (GFXC) has released materials from its last meeting in Tokyo, including progress reports from its various working groups, a new illustrative example on “cover and deal” trading activity and a presentation on flash crash events in foreign exchange markets.

The new cover and deal example, to be included in the Code in a future update highlights so-called “under-filling” of client orders using the last look window. The negative example highlights that a participant accepting an order on the understanding that it is operating in “cover and deal” mode and therefore not assuming any market risk, cannot execute the full amount with its own LP and then under-fill the client because the market has moved. The Code states, “Market Participants that utilise the information from trade requests to conduct trading activity in the last look window should always pass on to their client all volume that is traded in that period. In this example, the bank has not passed on to its client the entirety of the volume that it traded in the last look window, but has sought to take advantage of price movements to close out their position more profitably in the market.”

This issue was actually at the centre of an unfair dismissal claim brought by former-JP Morgan FX salesperson Patrice Ktorza, who initially won a claim against the bank that was subsequently overturned on appeal after it sacked him for under-filling client orders.

The meeting also heard an update on the work of the Disclosures Working Group following the release of its report in February into the issue. The Tokyo meeting heard that the group had followed up the report by focusing on the perceived challenges to understanding aspects of trading capacities and behaviours on anonymous e-trading platforms identified in February. The Working Group has focused on two areas; identifying key relevant themes to shape the future work; and setting out a framework for mapping the flow of information across key types of market participants (and the variation across that flow) in this segment of the market landscape.

“There are signs that the GFXC could be taking a more proactive approach to buy-side outreach by highlighting the business advantages of adoption as well as the desire to be perceived as an “informed and responsible market participant”

Some of the key themes discussed — and which were agreed to be important in shaping the work forward — included the recognition that anonymous trading platforms are key elements of the FX market structure because they can cover a broad spectrum of anonymity and have varying practices and levels of anonymity. It was also noted that the various roles in which a market participant can act on an anonymous platforms can add complexity to understanding the flow of information; and that methods to engage in a dialogue regarding expectations and transparency around counterparty behaviour can be “complicated” by the anonymous nature of some platforms.

Members also provided feedback on a draft framework for setting out a high-level flow of information across key parties throughout their engagement on an anonymous e-trading platform. Key components of the framework were discussed, including the key mechanisms of information flow including disclosures, price streams, unique identifiers, settlement communications, and account managers/end of day reports; the key roles in which a market participant can act on an anonymous e-trading platform including, the platform itself, a liquidity provider, a liquidity consumer, and a prime broker; and the key stages of engagement including, on-boarding, pre-trade, execution, and post-trade.

Members agreed that the framework set out a reasonable structure for summarising high level themes in the flow of information in this segment of the market and the broad variations across the segment.

The GFXC further agreed that the Working Group should continue its work building on the themes and the aforementioned framework to produce a draft paper ahead of the next GFXC meeting in December with the aim to publish a report similar to the February 2019 report on cover and deal and provided feedback to help shape that work. It was agreed that the report should promote greater awareness of this segment of the market, draw on the disclosures characteristics set out in the February 2019 report on disclosures, highlight key principles that market participants should be particularly cognisant of in the context of anonymous platforms, and provide recommendations for relevant areas of work for the GFXC’s three year review of the Code.

It was also agreed that the Group should reflect on the draft examples produced by the Working Group on cover and deal related to the anonymous e-trading platform landscape as it continues its work.

The Tokyo meeting also heard an update from the GFXC’s Buy Side Outreach Group which is tasked with increasing buyside uptake of the Code – an area in which critics have said it is falling short of expectations. The Group highlighted its work to make accessing the Code easier for the buy side and also unveiled a presentation to highlight the benefits of Code adoption.

The presentation probably signals the likely approach of the GFXC in its buy side outreach efforts – that there can be a business advantage in signing up to the Code. In the presentation material developed by the group one slide lists reasons why a firm should commit. As well as highlighting how adherence can provide an opportunity to improve internal FX operations and provide insight into the latest market trends, the presentation also notes that adherence “informs stakeholders and investors that you are an informed and responsible market participant” (original bold). It further observes that commitment also supports a “fair”, effective and resilient FX market; fosters “a level playing field between buy-side and sell-side (original bold)and improves quality of pricing and execution’; and gives market participants a competitive edge when it comes to demonstrating their conduct credentials, as well as strengthen the buy side’s voice in the industry.

The second day of the Tokyo meeting saw the GFXC discuss recent developments and trends in the FX market as well as receive a presentation of flash crash events. In terms of current conditions, the prevailing low FX volatility was a key feature of the market over the previous six months, as meeting participants noted the impact central bank policies have had. For some, the increasing use of systematic trade execution strategies had the potential of producing sudden volatility spikes under certain conditions. More broadly, members observed that FX turnover volumes in April were low suggesting that the BIS triennial survey results would also show a decline since 2016.

Representatives from each GFXC member provided an update on recent activities, developments and issues in their region. Preparations for the transition to risk free reference rates was a common theme across the committees, as were continued efforts to increase awareness of, and adherence to, the Code in the buy-side community. The increasing use of algorithmic execution in FX, and what that meant for the structure of the market and governance structures was a topic of discussion in some regions, as were developments in the retail FX trading space.

GFXC vice chairAkira Hoshino provided a presentation which included observations on the mechanism and characteristics of the USD/JPY flash events on 3 January 2019. Toshihisa Hirose from the Bank of Japan also expressed views on flash events from a central bank perspective. Based on the actual experience both on 3 January and Japan’s long national holiday, “Golden Week”, he highlighted the usefulness of close communication among relevant entities in addition to utilising market data.

To better understand the FX market flash events, the committee also discussed various features observed at each stage of the event, including potential causes, impacts across the marketplace and possible responses by the GFXC. At the same time, it raised topics such as the increased presence of retail aggregators, non-bank liquidity providers and thriving demand for algorithmic execution by buy-side market participants.

“The Tokyo meeting showed the integral role the GFXC plays in promoting a robust, liquid, open and transparent FX market,” says Hoshino. “Our discussion around flash events provided a clear example of how the GFXC serves as a forum to consider timely issues and whether they might have implications in the foreign exchange market among a broad range of official and private sector market participants.”

Colin Lambert

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