Ian Battye, chief investment officer, currency, at Russell Investments, talks to Profit & Loss about the next steps for driving the adoption of the Global Code of Conduct within the FX industry. 

Profit & Loss: The FX Global Code of Conduct has obviously been a big initiative within the industry, but how much do your clients – the asset owners – know about it? 

Ian Battye: Perhaps a little disappointingly there isn’t a great knowledge of even its existence amongst asset owners. That’s why at the moment we’re trying to help create a level of awareness around the Code by explaining why we have signed up to it.

P&L: Who is really going to drive the adoption of the Code? Is it going to come from banks and platforms insisting on adherence or is it going to be driven by investors and buy side firms demanding that their providers sign up to the Code?

IB: I think that the latter is more likely. I think that adoption will be driven by well-educated clients understanding what the Code is and its purpose, and then asking some very reasonable but nonetheless challenging questions for participants in the market, asset managers in particular, and then banks and other financial institutions down the line.

“Why is it that you haven’t signed up to the Code?” I think with questions like this will come a great deal more awareness, and this will ultimately generate the momentum behind the Code.  At its core, the Code consists of 55 principles that speak to practices for all market participants that are in the best interests of the end user – how can challenging any provider in any capacity to adhere to that be a bad thing?

P&L: Could the Code ever complicate your fiduciary responsibility to clients? To give a hypothetical as an example, if all of your counterparties except one was signed up to the Code, but you felt like that one counterparty is the best to trade with from a purely financial perspective, would your fiduciary duty compel you to avoid that counterparty or to trade with them? 

IB: Our reading and interpretation of adherence means that I don’t think you’ll find this sort of conflict much. A financial outcome that’s in the best interest of clients is ultimately driven by the adherence of all the participants in the FX market place to the individual sections of the Code and therefore, rather than being exclusive, doing one creates the natural result that is going to be in the best interest of clients.

P&L: Would you consider refusing to trade with counterparties that haven’t committed to the Code?

IB: We’re certainly not in that position as of yet. Part of the reason for that is because we haven’t fully engaged with all of our bank counterparties yet to educate them about our position on the Code and so, given the relative newness of it, I think that might be somewhat unfair.

That being said, we are working to educate our bank counterparties about our approach to the Code and the efforts that we’ve taken around it. And in doing this we’re creating a set of expectations that they will be following suit and doing their requisite due diligence.

So I don’t want to draw a line in the sand on this because I know that our due diligence took time to complete, and I want to make sure that we also give our bank counterparties the time needed to do the same. I’d be much more comfortable with bank counterparties saying that they’ve embarked upon that effort but are still working on it, than I would be with them giving me the impression that they’ve just paid lip-service to the Code.

P&L: A lot of the Code appears to be common sense to most FX market participants. Does the industry really need a document like this just to tell market participants not to rip off their clients? 

IB: It’s a good question. I’ve used the word “maturity” to describe the Code, because I think that its production is a sign that the industry is maturing. Yes, many of the principles are self-evident, in many cases fiduciary standards already define a set of behaviours consistent with the Code and the competitive nature of the market place would eventually dictate that providers not meeting that standard would generally see less business than others who don’t.

But just having the broad-based industry initiative define a set of market standards that were not imposed by the regulator is a sign of maturity for the industry. And I think that a more subtle and perhaps more important point is that this is a sign of maturity that can hopefully build confidence into the market place.

There are also some practical advantages for market participants in understanding in a very detailed way what is expected because often that dialogue doesn’t happen between a price taker and a price maker.

P&L: In the UK, there has been talk of embedding the Code into the Senior Managers Regime (SMR), which would arguably effectively make it regulation. How do you feel about the concept of the Code becoming regulation?

IB: In and of itself, I don’t see that as a bad thing. But I think there might be some more immediate steps that the industry could take, and one practical idea that comes to mind would be to create a register of who has signed up to adhere to the Code.

At the moment there is no formalised register of this kind, but having one would make it more obvious to people, who has signed up to the Code and who hasn’t, and then it would sharpen the conversations around those that haven’t about why that may be the case.

So this would be an important next step and I would love to see it happen. Now if this step gave rise to a greater level of formality and the Code was incorporated into other regulations, my personal view is that this would not necessarily be a bad thing. That’s because it would become regulation that has been driven by the market place and with people who have a deep understanding of the market place and those ultimately are the hallmarks of the best regulation that you’re likely to find.

Galen Stops

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