The Global Foreign Exchange Committee (GFXC) has named Simon Potter executive vice president of the Federal Reserve Bank of New York, as chair for a one-year term. At its meeting this week in Johannesburg, it also nominated and elected Adrian Boehler, global co-head of FXLM and commodity derivatives at BNP Paribas, and Akira Hoshino, senior fellow and managing director, head of global markets trading at MUFG Bank, to serve together as co-vice chairs for a two-year term.
Speaking to Profit & Loss after what Potter says was a very productive meeting, he is keen to stress the diversity and engagement represented by the GFXC. “The new leadership structure will enhance the GFXC’s outreach across diverse market participants in the industry, as well as across regions. We want to continue to stress this is a global code and as such it is important to have representation from Asia, in the form of Akira, as well as Europe and the Americas. The contribution of the private sector has been remarkable in helping to create the Code and also in raising awareness of it.
Although Potter says that buy side adoption of the Code has “probably been better than we expected”, he does acknowledge that further engagement is required. “The sell side is quite used to adapting to best practice requirements, but the buy side represents a much more diverse landscape,” he explains. “We have established a buy side liaison committee to help promote the Code and build understanding of why it is useful for their business.
“The buy side is fully engaged with the market but has not always taken full responsibility of being a market participant, this will be a key focus of the education effort,” he adds. “What is required to adhere from the buy side is different from the sell side, but there are common themes, for example, from Principle 1, through the Code, there is a strong emphasis on ethics.”
One of the challenges in building adoption rates amongst the buy side is the sheer diversity of participants and again, part of the education effort will be to explain proportionality. “The requirements of a smaller corporate will differ to a large asset manager and corporate,” Potter observes. “I use the New York Fed as an example of how firms can engage with the Code and embed it in their businesses. It is a question of studying your processes and aligning them with the Code and then seeing if there are any gaps.
“Sometimes there can be some distance between what people are actually doing and what is considered best practice so once they are identified a plan can be put in place and the firm’s governance function can be brought in to ensure they are comfortable with the changes,” he adds.
The new liaison group will include: Stuart Simmons from QIC; Ankur Pruthi from Norges Bank Investment Management; Robbie Boukhoufane from Schroders; Natalia Chefer from DE Shaw; Takayuki Ohkuma from Nomura Asset Management; and Michael O’Brien from Eaton Vance.
Overall, Potter is confident that buy side adoption rates will climb, as he is that more non-bank market makers will eventually engage with the Code. “The non-bank sector was a big part of creating the Code and it is important that they are represented on the GFXC,” he says. “It is important to engage with these firms as they are innovators and tend to be very nimble and quick to adopt new strategies.”
When asked about the lack of adoption from non-bank market makers outside of the four (Citadel Securities, HC Tech, Jump and XTX Markets), Potter acknowledges the need to convince these firms of the value of best practice. “We discussed how to adapt our structure to achieve this engagement and we are seeing good progress,” he observes.
During the meeting, the GFXC discussed the progress of the working groups it formed last year to focus on three specific areas: disclosures, “cover and deal” trading activity, and negative examples of pre-hedging in relation to Principle 11 of the Code.
The working group established to develop additional negative examples related to Principle 11 on pre-hedging proposed drafts for discussion at the meeting and subject to minor revisions the GFXC agreed to add an example to the Code’s Annex, this will be published upon the release of the minutes from this week’s meeting.
“We had a productive discussion around pre-hedging and will continue to discuss those themes that emerged in work streams going forward,” says Potter. “Principle 11 is very tightly written and is based upon the premise that there has to be a benefit to the client. We wanted to come up with examples to help people understand other impacts on an order, such as the time horizon involved.”
Another area of major work for the GFXC has been continuing the evolution of Principle 17, which deals with last look. The working group reviewed its initial findings and proposed to the GFXC that the group conduct further work around the role that disclosures currently play in informing End Users about how their trade requests are being handled by Intermediate Providers that may be utilising “cover and deal” arrangements.
“We deliberately added the term “End User” for more clarity,” Potter explains. “These are the people that actually use FX and this helps define the how different business models using cover and deal interact with the End User. There is not as much understanding in the market of the breadth of cover and deal models as we would like, so our goal is to improve the disclosures and understanding around the different practices.”
In exploring the role that disclosures can play in establishing clarity around trading practices between market participants, the disclosures working group made two recommendations for further work, which the GFXC supported. First, to develop and publish a list of questions and characteristics, separate from the Code, that a market participant may consider in developing or reviewing their own disclosures. Secondly, to identify any relevant challenges or risks relating to the provision or receipt of appropriate transparency in the context of anonymous trading activity and consider further work as appropriate. The GFXC stressed the need to continue expanding this discussion across the diverse array of market participants.
The GFXC meeting also saw Georgia join the committee as its first associate member, something Boehler describes as “a very positive story”. He adds, “It is great that Georgia felt the need to reach out and be a part of this process. Many developing regions face the same issues but they also have local nuances and it is critical we capture these.”
Potter agrees, noting, “I like the diversity we are building in this group and it is important that we are inclusive.”
The work to engage more geographies is also apparent in Asia, hence Potter’s enthusiasm for the appointment of Hoshino as co-vice chair. Hoshiro himself notes that Asia is “very fragmented” and adds, “As Asian markets evolve it is important that we continue to stress the value of, and need for, a code of conduct. Having global reach and engagement is very important to a healthy global FX market.”
Ultimately, Potter is extremely positive about both the progress of the Code to date, and the prospects for it going forward. “The GFXC made a great deal of progress in its first year,” he says. “It is a great achievement to have over 300 Statements of Commitment signed and we look forward to adding to this number. This is a voluntary code and it is about embedding good practice into the market structure. With our new leadership structure I am confident we can expand our outreach efforts to help build awareness and adoption even further.”