Before unveiling the Global Code of Conduct (Phase One) for the FX Market at a press conference in New
York, Reserve Bank of Australia Deputy Governor Guy Debelle made it clear why
the new guidelines are necessary.
“Let me remind you why this work is occurring. As I have
stated on previous occasions, the foreign exchange (FX) industry has suffered
from a lack of trust in its functioning….The market needs to rebuild that
trust, so that participants and the public have much greater confidence that
the market is functioning appropriately.”
Debelle says it is in almost universal interest to have a well-functioning
FX market. “In a
globalised world, the foreign exchange market is one of the most vital parts of
the financial plumbing,” he
What the Code is intended to achieve is detailed elsewhere
on Profit & Loss. But Debelle
reiterates that there are two important points worth highlighting. “First, it’s
a single code for the whole industry and second, it’s a global code….The Code
is intended to apply to all aspects of the wholesale foreign exchange market,”
he points out.
According to Debelle, the development of the Code has been a
public sector-private sector partnership. It has been supported by a group of
market participants, chaired by FX veteran David Puth, the current chief
executive of CLS.
This group is made up by FX participants from around the
world and from both the buy and sell sides, along with trading platforms, ECNs
and non-bank participants. In other words, the Code has been drawn up with the
participation of what Debelle describes as all parts of the market.
The Code’s development has been split into two parts. The
first phase, published today, covers ethics, information sharing, aspects of
execution and confirmation and settlement. The second phase, which is due for
release in May 2017, will cover further aspects of execution, prime brokerage,
as well as governance, and risk management and compliance.
Debelle admits that a lot of time has been devoted on trying
to work out how to ensure widespread adoption of the Code. “Clearly, that has
been an issue with the various existing codes that have been in place in a
number of markets over many years. It is evident that they were ignored on
occasion, wilfully or otherwise,” he says.
That said, the Code will be principles-based rather than a
set of prescriptive regulatory standards. “The success of the Global Code in
promoting integrity and restoring confidence in the wholesale FX market lies in
the hands of its participants. That is why the Global FXCs have issued today a
joint statement of support making clear their intention for the Global Code to
become an integral part of the wholesale FX market. Furthermore the BIS central
banks are today signalling their commitment by announcing that they themselves
will follow the Code, and that they expect that their counterparties will do so
too,” Debelle concludes.
Responding to a question on whether the code lacks teeth,
because it consists of principles not rules, Debelle says: “This is not
regulation, we are establishing principles. As I’ve said on a number of
occasions, one issue of writing rules is that rules are much more easily
arbitraged than principles.”
He adds: “One of the motivations in doing this work was that
we felt a principles-based approach is basically more effective. Principles,
while not necessarily ruling things directly in or out, make people think about
what they are doing. We feel that there is value in a principles based approach
and providing guidance to the market and making it think about what it’s
According to Debelle, the adherence mechanisms that are
developed over the next year may provide greater comfort to those who have
scepticism. “Only the passage of time will provide the comfort you might be
seeking,” he says.
Puth also sounds extremely positive. Devising the Code has,
he says, “been a unique opportunity for key participants in the industry to
work together to develop a code of conduct that will have far-reaching implications
and ensure the long-term integrity and effective functioning of the wholesale
foreign exchange market.”
It will, he says, “supplement local laws, rules and
regulation by identifying good practices and processes. Importantly, the
biggest statement is that it will be a single code, applicable on a global
basis. When completed in May of 2017, this code will supersede every other code
and best practice currently in place.”
Puth believes that the collaborative nature of the work
behind the Code has been very important and he adds that some of the market’s larger
institutions have already started to adopt the Code.
“The release of the first phase of the Global Code is a
significant milestone in the development of a common set of guidelines for
responsible market participation. It is not a response to any single issue or
set of issues….it has been written to support a diverse set of participants and
while the very nature of global foreign exchange means there can be no
universal approach, the collaboration between the public and private sectors
will help ensure adherence, and ultimately restore confidence in the wholesale
foreign exchange market – the largest and most liquid market in the world,”
“In short, the code is about making us better and about
making this market the most successful in the world,” he concludes.