Profit & Loss talks to David Puth, CEO of CLS and Chairman of the Market Participants Group (MPG), about how the
FX Global Code of Conduct will work.
Profit & Loss: What was the process like to develop the Code
from start to finish? Were there challenges in achieving
consensus amongst so many different market participants?
David Puth: The development of the Code has generally been a
constructive process. The committees involved in its creation
are: the FX Working Group (FXWG), which is the central bank
working group; the Market Participants Group (MPG), which is
the group that I chair; and a number of industry groups,
including regional FX committees.
The working model between the MPG and the FXWG has been
very positive. The public/private nature of this partnership and
the way we’ve approached it has been unique in my
professional experience. It’s been an open exchange of ideas
and one that I think has been constructive from the outset.
It inevitably became more challenging when we opened up to
the broader market for feedback. We received over 7,000
official comments over the course of two years, each of which
was reviewed and considered for the final product.
We did not assume that we would have unanimity on certain
issues; instead we sought to achieve constructive resolution on
the more challenging topics.
P&L: Did the feedback you received tend to coalesce around
certain parts of the Code?
DP: There were some issues that attracted a greater amount of
attention than others. Regarding the first phase, we received
quite a few external comments regarding the definitions of
“agency” and “principal”. There was, and there remains, a
great deal of focus on the topic of “pre-hedging”.
The principle regarding pre-hedging is as follows: a market
participant should only pre-hedge client orders when acting as
a principal and should do so fairly and in a transparent
The Code focuses on what the market participant is seeking to
accomplish with pre-hedging a client transaction. If a market
participant advises a client that a better outcome could be
achieved through pre-hedging, and the client authorises that
step, pre-hedging would be absolutely appropriate.
P&L: In terms of Phase Two of the Code, are there any areas
where you think that the principles will offer significant clarity
with regards to best practices and good conduct?
DP: The focus that we have taken on last look will provide the
market with some genuine clarity about how this should be
P&L: Let’s talk about last look, because it’s a controversial
topic. Were you able to reach any consensus amongst market
participants regarding the practice of last look when
developing Phase Two of the Code?
DP: Again, I’d use the words constructive resolution. There’s
nothing that’s gone into the Code that would be representative
of a minority set of views.
By the end of this process there will have been at least 1,500
pairs of eyes on the Code. Is there anything about which 1,500 people can completely agree? Maybe 1,500 people can agree
that Brexit is an interesting issue, but that’s probably about it.
What we were able to do was reach constructive resolution
among a broad number of market participants regarding the
concept of last look. We did not consider for more than a few
minutes whether or not last look should exist; we did not
believe that to be our role as a committee.
Last look is a reasonable part of the market that exists today,
so our role was to opine and explore how last look can be
appropriately employed. We also looked at situations where it
could potentially be abused and how people should be aware
P&L: How much of the Code is simply common sense?
DP: I think a great deal of it is common sense, but of course it
goes well beyond that. We’re trying to create a spirit of what is
good practice, and yes, much of it is common sense. But
people, at times, have different interpretations of common
P&L: Once the Code is launched, what happens next?
DP: There will be a very well-articulated structure that will be
shared with the market on the 25th of May. The most
immediate goal is getting the largest number of market
participants on board with this as quickly as possible. Part of
that is just making people aware of the content within the Code.
The Code was written for all wholesale market participants.
Every market participant needs to be reading and
understanding the Code, and thinking about what it means for
their firm. It’s incumbent upon everyone – buy side, sell side,
platforms, corporates, hedge funds, asset managers, and
small, medium and large banks – to know how the Code
applies to them.
To do this, they need to read and genuinely understand the
Code. Once they’ve understood it, market participants need to
ask: are there additional steps that I need to take to make sure
that I’m in compliance with the Code? That’s a critical
P&L: Are you happy with the adherence mechanisms for the
Code as they currently stand?
DP: The first step is for market participants to sign something
called the “statement of intent”. This will indicate to clients,
employees, counterparties and even regulators, that they’ve
read and understood the Code, and that they believe it will
serve the greater market good. It also indicates they will review
the Code to find out what it means and commit to getting
At some point in the year that follows, we’re going to look for
market participants to provide a “statement of commitment”.
This will go beyond the statement of intent, and commit market
participants to building the Code into their internal practices.
Those are effectively the adherence mechanisms. But here’s
the part that people tend to forget or confuse: we can’t,
through this code, through any other code, or even through
regulation, guarantee to prevent fraud or stop people from
committing a crime.
P&L: Are you at all concerned that, because it’s not regulation,
some firms might not prioritise adherence to the Code
because they want to focus on incoming regulatory
DP: No, I feel very confident that people will realise how
important the Code is to their business. You could also take a
different side to this question by pointing out that what we’ve
put in place with the Code are very logical best practices.
Consequently, they should not be difficult to enact.
There are certain elements in the Code where it is highlighted
that market participants need to become better educated to
understand what systems they are using or what product they
are buying. The Code simply does not add to a long list of
regulatory requirements. It is relatively straightforward to follow
and to put into practice.
P&L: After two years of working on the Code, how do you feel
personally now that it’s finished?
DP: I’m very enthused about seeing this come into practice. I
think this process has been a very positive thing for members
of the FX community. Those of us involved in the Code felt that
this was both a great opportunity and a great responsibility to
play a role in shaping how the market would operate in the
years ahead. It’s something about which we are very proud.
There is still a great deal of work ahead. While the specifics
haven’t been announced yet, I expect that some of the people
involved in the committee will continue to be involved as the
Code progresses and evolves from here.