Outgoing Global FX Committee chair Simon Potter remains optimistic about the impact of the FX Global Code and has signalled a busy work schedule for the Committee and its working groups over the coming year.

In an interview withProfit & Loss Potter outlines the continuing work of the separate streams established by the GFXC, but makes it clear that more needs to be done and that the outreach programme of the committee will continue apace. In 2018 the GFXC established working groups to look more closely at the “cover and deal” model and disclosures, following that up with the forming of a buy side outreach working group later that year. In February, the GFXC published three papers detailing the progress of each working group and these were the main topics during the first day of this week’s two-day meeting in Tokyo.

The February paper on Cover and Deal stressed the need for adequate disclosure of the practice, which at a top level involves liquidity providers back-to-backing certain risk to other LPs, however Potter says that this week’s “robust discussion” also highlighted the need for greater understanding of the model and where and when it is used. “The notion of ‘cover and deal’ is not a phrase that is clearly understood by market participants, either because some firms are obtuse about what they offer or because there is a lack of understanding on the part of the client” he explains. “Clients need to know exactly how their liquidity is sourced for them – indeed Principle 17 stresses LPs have to disclose if they act in this capacity – and despite our good work to date there was a feeling that more was needed.

“It was also notable that cover and deal is not just a method used by smaller regional banks or brokers as is widely believed,” he adds. “Some larger global banks are also using the practice is certain crosses and while some have very good disclosures around this, others are not so clear.”

In response to the discussion, the GFXC is to look into narrower, more focused examples for Principle 17 of the Code, specifically involving cover and deal.

The February paper on disclosures included initial views from the working group on practices in the anonymous trading arena. Potter says this week’s discussions around that paper focused on the need to take the relevant principles and apply them to platforms designed to protect anonymity. “We looked at the flow of information across platforms in general as it was agreed that we can’t look at a particular style of trading – we have to have a robust set of principles that apply to all forms of trading,” he says. “This is a particularly large working group and it needs to ensure that whatever form of trading a participant conducts, the Code remains relevant.”

The tricky issue of expanding buy side commitment to the Code was also discussed at this week’s meeting and Potter acknowledges that there is a sense in some areas of the buy side that the Code is a sell side focused solution. He believes, however, that it is just a question of educating the buy side about proportionality and the value to their businesses from adoption. “There is no doubt that the Code resonated strongly with the sell side as much of it deals with behaviour in that segment,” he says. “With the buy side we want to take a multi-pronged approach.

“For some buy side firms like corporates, their activities are very different to a major banking group and as such how they can use the Code will be different, and we want to stress this concept of proportionality,” he continues. “There are other buy side firms, large asset managers for example, that in many instances can look a lot like a global bank. They have clients in their investors, interact in the market in a similar fashion by trading frequently and often have very centralised operations. For these firms it is not just about explaining to them the positive benefits of adopting the Code, the message can also be that adherence highlights that they are a good market citizen.”

Looking ahead, aside from the continuation of the working streams, the GFXC is preparing for its first three-year review of the Code. Ahead of the review Potter says the GFXC wants to get “as much feedback as possible” from market participants. This will be done through a series of surveys, feedback from the local FX committees and a more targeted outreach programme, Potter also observes that the impending BIS Triennial Survey of FX Turnover, due for release in September, will also provide a strong framework within which the review of the Code can take place.

“My view is that unless we hear something that suggests the Code is not fit for purpose, this will be a targeted review,” he says. “It will focus on those principles most impacted by the evolution of e-trading, such as large order handling and flash events, as well as the resilience of the prime brokerage model.

“To establish the framework for the review, however, we want to get the widest possible range of participants’ feedback to allow us to have this targeted review,” he adds. “We are serious about ensuring the evolution of the Code reflects changes in the market and that means some principles may need further tweaks if they are to remain relevant, which is the most important thing.”

As Potter steps down from his two-year spell as chair of the GFXC, there is a sense that the pace of work on the committee is stepping up another notch. This can be seen in the output from the working groups, but also in the relatively small but important detail that the Terms of Reference for the GFXC have been adjusted. These terms were always intended to change over time, but the latest change appears to stress the continuous work of the committee. Alongside changes to membership criteria, the Terms of Reference now outline in more detail the work of the Secretariat to the committee, which is staffed by members of the relevant central banks. “We wanted to more clearly articulate that the work on the Code goes on throughout the year – it is not just about the GFXC meetings,” Potter explains. “The pace of change in FX markets can be quick and we want to stress that the work of the GFXC reflects this and is ongoing.”

Colin Lambert

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