The changing nature of foreign exchange markets, not least the day-to-day participation of the buy side, offer a good rationale for why buy side firms should sign a Statement of Commitment to the FX Global Code, speakers argued at the recent Profit & Loss Frankfurt conference.

Ahead of the Global Foreign Exchange Committee meeting in Tokyo on May 22 that will also hear updates from the cover and deal and disclosures working groups, much of the conversation on the panel focused on the efforts of the GFXC’s buy side outreach group and the prospects for these firms to sign up to the Code.

Christoph Hock, head of multi-asset trading at Union Investment Privatfonds, highlighted the changed business structure within his firm as a good example of why a buy side firm should adhere, namely the increased importance of the trading desk. “All trading across asset classes goes through our desk, but whereas five or 10 years ago the message was ‘get me done’, now, thanks to regulation and the changing nature of liquidity, the desk is seen as an integral part of the firm’s USP. The complexity of markets means that if we are smart about how we source and access liquidity, we can become a source of Alpha to both our internal clients – the portfolio managers – and our external clients – our investors.

“As a services and solutions provider to these clients, we have an obligation to deliver high quality outcomes, driven by the highest standards – and the Global Code is one such standard,” he continued. “We have long been used to regulation in other assets classes, for example MiFID I in 2007-08 which impacted equities markets, and MiFID II more recently that looked at fixed income markets, but FX has remained the only asset class in which there was not a lot of global regulation. It is a very important market, however, and in the Global Code we saw the opportunity to align and judge ourselves alongside the highest standards in foreign exchange.”

Making the interesting observation that he was also a buy side participant as well as a central bank, Jens Budde, market expert at the Deutsche Bundesbank, saw an opportunity in the Code to better understand and monitor service providers’ activities and practices. Acknowledging, as many buy side firms have, that not all the principles in the Code are applicable to its FX business, Budde said his team got backing from the Board to conduct both an internal and review of all FX-related processes in the bank.

“We engaged all the different departments of the bank who interact with the market, including risk control, compliance and corruption prevention, back office and front office and asked them to go through each principle to ensure we were aligned with it,  and to see if there were areas that needed clarification or change,” he explained. “It was a valuable exercise.

“One principle  in the Code recommends that the client understands how their banks are operating in the market[1],” Budde continued, revealing that after analysing its ownactivities within the scope of the Code, the Bundesbank decided to use it as the basis for future dialogues with its service providers. “It was an excellent framework for discussion with our counterparties, and it gave us a better sense of how these firms acted in the market and handled our business,” he added.

Tobias Helmersson, portfolio management expert within the bond markets and international operations division of the European Central Bank, stressed the concept of proportionality that permeates the Code. “Not all principles will be applicable for all market participants, however buy side firms can see how their activities and practices sit within the guidelines of best practice,” he acknowledged. “This should not just be a tick box exercise, instead, the Code is intended to make all market participants and their staff think about their operations. There are many areas where there is no simple, straightforward answer to a question, often it depends on your type of FX activity and how your firm interacts with the foreign exchange market, but by adopting the Code, firms can at least ensure that where they do interact, their internal practices and procedures are appropriate.”

For his part, Hock felt it was difficult to categorise the 55 principles. “You can’t pick and choose which principles to look at,” he argued. “All are equally important. We found that by going through the Code thoroughly, we were able to ensure that all our key processes were underpinned by the highest standards.

“This is increasingly important, because as I noted earlier, we are a service provider – we have clients,” he continued. “Investors are already asking us about business standards and how we adhere across asset classes and foreign exchange is no different, so when we go into pitches or to meet existing investors they want to know about how the trading desk operates as well how the portfolio managers go about their business. I think this can be a real differentiator when pitching for investor business.”

Budde observed that interest in the Code and ensuring businesses were aligned with its principles, was also high among central banks that were not perhaps intimately involved in its creation. “We have worked closely with the European System of Central Banks,[i.e. the European Central Bank and the national central banks of all 28 member states of the European Union], to share our experience of where the Code can help,” he explained. “All central banks understand the importance of having a good knowledge of the Code both from the perspective of how they operate in the markets but also how participants act in their local markets.”

On the crucial question of getting more buy side firms to sign up to adhere to the Code, Hock reiterated his view that as a service desk it was vitally important for a buy side execution desk to demonstrate it understood and adhered to the highest standards. “We view adherence to the Code as a signal to our investors that we operate to the highest standards,” he said. “It used to be that people were only interested in the activities of the portfolio managers, but that has changed – now the trading desk is also an integral part of the value proposition.”

For his part, Helmersson cited last year’s report from NEX Markets about ”changing transparency and behaviour” on out its trading platforms as evidence that the Code has helped improve execution quality. “As we have been talking to portfolio managers it is clear they are looking at market impact more closely than ever,” he said. “So while at a high level a firm can signal it’s desire to be a good market citizen, there are real tangible benefits to the business from the Code.

“There is also the opportunity to have a voice in the shaping of the future of the foreign exchange market,” he observed. “The market is evolving and it will have a big impact on both buy side firms and their investors. By signing up and adopting the Code, these firms will be able to help steer that evolution, beyond being part of the more than 800 firms that have signed the Statement of Commitment to the Code.”

[1]Principle 9 of the Code asks that Market Participants acting as Clients should:

  • be aware of the responsibilities they should expect of others as highlighted above;
  • be aware of the risks associated with the transactions they request and undertake; and
  • regularly evaluate the execution they receive.

Colin Lambert

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