As he assumes the reins of the Global FX Committee, Reserve Bank of Australia deputy governor Guy Debelle talks to Colin Lambert about the impact of the FX Global Code and the importance of maintaining momentum as the GFXC seeks to broaden its reach.

Colin Lambert: We are now more than two years on from the launch of the full version of the FX Global Code and approaching the Global FX Committee’s first three-year review of the content – do you feel the Code has improved market functioning?

Guy Debelle:  I think it has. Information sharing is probably the area where it has had the most impact, communications channels between firms and their clients appear to have been opened up – although not everyone agrees with that. We probably still have a few areas where it is harder to discern the impact of the Code, such as around execution. Overall though, I think the Code has provided the focus the market needed so that participants can ask the right questions of each other and of their own business function.

CL: Looking at the work of the GFXC, two key areas of interest appear to be cover and deal and disclosures and we recently had an update from the Working Groups dedicated to those themes, are they likely to dominate the three-year review? 

GD: The details of the review have yet to be decided, this year’s GFXC’s survey will include questions about what areas respondents feel need looking at, we will also reach out to the regional FX committees to ask their members and get a sense of what they are concerned about and what they think needs revisiting. Our intention is to get as broad a participation as possible. People can also get in touch with me directly!

The Working Groups have identified areas that need further work and so obviously this will, I think, form a large part of the review, especially aspects of anonymous trading and the roles of prime brokers and the platforms.

We want to ensure we ask the right questions of the right people so that we can finalise details of the review at the next GFXC meeting in Sydney in December.

CL: How deep is the review likely to be?

GD: Personally, I am comfortable with the bulk of the Code, but there are, as noted, a few areas that may be in need of some clarification. The market has evolved in the two years since the full launch and we need to reflect those changes and see if they have implications for the Code, but my hope is that the review will not involve more than maybe half a dozen principles.

Guy Debelle, Reserve Bank of Australia

I also want to stress that we don’t want to revisit old issues that have largely been settled, especially if the landing ground will remain the same. We are aware that not everyone is in agreement with everything in the Code, but what we have achieved is a reasonable consensus and reopening certain discussions to get back to the same point will not be helpful.

Pre-hedging is one area I fully expect to be raised and to be a part of the review, there is a sense that participants think parts of the Code address this well and others less so, but even here I am not sure we need to change the Principles, more that it would be useful for the GFXC to provide additional context – to give participants a guide in terms of what they should be thinking and asking in certain circumstances. This could be separate to the Code, although it may not be as specific as a new example either. It’s really about the implications of certain actions, for example “these are the issues you should be thinking about”.

CL: It strikes me that most of the areas of interest will be about execution.

GD: Execution remains a big theme undoubtedly, but generally speaking I think the Code does a good job, it really is likely to be about clarifying a few aspects and tightening up the language. Again, I don’t think the landing place will be very different after we have reviewed, but there may be a few changes.

CL: A big theme of the Code at launch was to increase transparency as well as the market functioning, and my sense is there is still more to do here as witnessed by the output of the Working Groups. Has transparency improved over the past two years?

GD: Market participants are more aware of the need for transparency so there I think it has worked well, however there are still ongoing issues, such as around anonymous trading.

Cover and deal was initially expected to be about lower tier players and those with regional specialities but it obviously affects more participants than we thought. The aim is for the customer to know where their services are coming from and how their service providers are handling their business – that they cannot misrepresent themselves for example as a liquidity provider in all currencies when they pass through risk in the last look window in certain pairs.

The protection in the Principles dealing with cover and deal is that participants have to tell counterparties what they do and how they do it, but one problem is do are they telling them in a general sense that this is their approach, or are they doing this on a case-by-case basis? There are likely to be instances when they cover and deal and others when they don’t.

One challenge, and overlap with the work of the disclosures group, is when it comes to anonymous trading. In most circumstances, participants will tell the client they cover and deal, but on an anonymous platform, the reliance on disclosures becomes difficult. This is part of the broader issue of anonymous trading and the issues it raises for the Code and so is likely to be a big part of the review.

I also think there is useful transparency and what you could call less than useful transparency when it comes to disclosures. There has to be some detail to help the counterparty understand how their business is handled, we cannot have disclosures which basically say “we can do anything we want when dealing with you and this represents our advice to that effect”. That kind of caveat emptor disclosure is not in the spirit of the Code and is unhelpful in improving transparency – it does the opposite in fact.

CL: Critics of the Code pick up on what they see as a poor response from the buy side and the GFXC has had an outreach group working to increase adoption in this area with what appears mixed success. My sense talking to your predecessor after the Tokyo meeting was that the Committee will be taking a more proactive approach going forward. Is that perception right? 

GD: It is very much our intent to reach out to those firms who have not, for whatever reason, yet embraced the Code, we want to understand why. I think initially we were a little too optimistic in thinking the buy side could hit the one-year deadline for adherence, but we now plan to go into these businesses at the right level to find out why adoption hasn’t been higher. It could just be priorities in which case we will seek to explain why it maybe should move up their list of priorities. Overall though, yes, I think our approach will be more proactive.

We cannot have disclosures which basically say “we can do anything we want when dealing with you and this represents our advice to that effect”. That kind of caveat emptor disclosure is not in the spirit of the Code and is unhelpful in improving transparency – it does the opposite in fact.

CL: Proportionality was a key part of the original message to the buy side, but it doesn’t seem to have hit home, does that message need to change?

GD: I don’t think so, we have been delivering the message but as you say, it hasn’t resonated, but that will continue to be a big part of the buy side outreach programme because again, we want to understand why it has not got through. It was recognised that the sell side were very much incentivised to adopt but the buy side – while it generally saw the value of the Code – was less so. I think that is changing though, especially as buy side firms look to take more responsibility in the FX market through buy side-to-buy side initiatives for example.

My view is that anyone who thinks about how they execute their FX requirements is a market participant and therefore parts, or all, of the Code applies to them. Even for firms with minor interaction in the market the Code can still be relevant and applied to how they execute their requirements.

CL: The UK’s Financial Conduct Authority recently recognised the Code, which was seen in many parts as giving it “teeth”, as well as something that could help raise adoption levels. There is a feeling that the FX market still has a Sword of Damocles hanging over it because it is vulnerable to the behaviour of a small minority, will such recognition help alleviate those concerns?

GD: First of all, there are always going to be people willing to push the boundaries of what is acceptable, but signing up to the Code signals you are not one of them and that you ensure your staff understand that. I suspect the response might be quite different depending upon where you are in the world if you behave badly, but the FCA’s recognition of the Code signals that jurisdiction’s intention to act.

The FCA endorsing the Code is a good thing because it provides context and a framework for everybody. We had a similar response here in Australia when the local regulator ASIC endorsed the Code and it means that when these authorities go into a business to review its operations they will be using the Code as their guide. The Code is not regulation but it is helping to guide regulators as they inspect FX businesses and by association demonstrates to those companies what the authorities are likely to consider unacceptable conduct. In the case of the UK, the FCA’s recognition of the Code aligns it with the UK’s Senior Managers’ Regime which is a further incentive to good behaviour and a mitigant against bad.

CL: I wanted to ask you about the broader work of the GFXC. Obviously it is closely associated with the Code but the past two meetings have had a second day dedicated to sharing and debating market issues around the world. Is this something likely to continue?

GD: The GFXC is very much about more than the Code, it provides a useful platform for discussion and to get regional issues into the wider consciousness, if you look at most local FXC meeting agendas the Code is no longer the main theme.

In Tokyo we had a presentation and discussion on flash crashes in FX as a global issue and in December in Sydney we will being doing something similar on benchmarks.

CL: To go back to the Code, you stepped away at the time of the launch of the full version two years ago, and you are now back in the chair of the committee that maintains it. How would summarise its value over that period?

GD: As we have discussed there are a few areas that probably need a little work, but I believe the FX market is a much-improved place compared to a few years ago – and that is borne out by surveys of market participants. Is there more to do? Absolutely, and the Code will, as I stressed at launch, remain a living document that reflects the changes in the FX market structure. The geographical reach of the GFXC continues to expand, which in turn helps grow the Code’s footprint and ensure that it accurately reflects and deals with the challenges in the FX market.

Colin Lambert

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