Along with today’s launch of the full Code, the FX Working
Group (FXWG) has also published its Blueprint
for Achieving Adoption
, in which it lays out four key tenets.

These are:

(I)           
The Code should be clear, relevant and reflect
good practice in the FX Market;

(II)         
It is the responsibility of market participants
to take appropriate steps to adopt the Code in their day-to-day practices and
culture;

(III)       
It is the role of central banks to lead by
example and demonstrate their commitment to promoting and maintaining good
market practice;

(IV)       
It is important that market participants and
central banks maintain an active engagement with the Code and have appropriate
structures in place to ensure that it remains relevant.

The document notes that the Code incorporates “the principle
of proportionality” in order to strike a balance between respecting the
diversity across jurisdictions, both in terms of market structure and the
regulatory treatment of FX, and retaining consistency in what is a global
initiative.

It adds that within the Code many of the high-level
principles require participants to exercise judgement. “For example, the Code
sets out principles for what market participants should consider when designing
their risk management framework, but
acknowledges that what constitutes an effective framework will vary
substantially between market participants based on the nature of their
activities,” it states. “This principles-based non-prescriptive approach is in
line with the voluntary nature of the Code and encourages market participants
to ensure that they understand the principles of the Code and carefully
consider whether their actions are consistent with them.”

As far as participants actually integrating the Code into
their practices and culture, the document notes that the FXWG has identified
three key elements that it considers they will need to have regard to in order
to establish an effective framework for adopting and adhering to the Code:

  • How
    the Code is embedded in a market participant’s practices;
  • How
    a market participant will subsequently monitor its practices against the
    Code;
  • How
    a market participant might demonstrate its adherence to the Code.

The FXWG says that organisations will need to undertake an
assessment of their existing procedures as well as monitoring processes and,
where necessary, update them. It adds this should also involve the appropriate
training of staff. “More broadly, market participants have an interest, and a
role to play, in promoting and upholding good practices in the market as a
whole,” the document states. “This can be partly achieved through leading by
example, but can also be supported by having similar expectations of
counterparties and other market participants and helping to raise awareness of
the Code in interactions with such parties.”

To help with implementation, the FXWG says it has, with
assistance from the MPG, has undertaken an outreach exercise to more than 120
industry associations and key market infrastructure providers globally. It has
targeted the latter, along with associations, as “key vehicles” for raising
awareness of the Code and says the response from associations and
infrastructure providers has been very positive. “Some have already published
statements in support of the Code and have started educating and raising awareness
among their membership/client base,” the FXWG says.

A key element of the Code is the Statement of Commitment
that accompanies it – the signing of which will enable participants to overtly
demonstrate their adherence, something that is likely to take between six and
12 months as participants install the appropriate framework.

Recognising the importance of market participants
demonstrating adherence to the Code, the FXWG says the MPG has been exploring
the potential creation of public registers where market participants could publicly
demonstrate their use of the Statement. “The FXWG encourages market-based
initiatives such as this that are intended to support the Code and its
objectives,” it states. “Work on public registers is still in development with
a number of possible options under consideration, including establishing a link
between registers for ease of overview by interested parties, such as
prospective counterparties and clients.”

The adoption process will be started by the central banks
involved in the creation of the Code. As stated previously, these institutions
have publicly committed to only dealing with institutions that adhere to the
Code (with some exceptions that may arise due to legal processes).

The FXWG also says that a number of regional FX committees
(FXCs) have also decided to link membership of the group to adherence with the
Code. “All FXC members (or their firms, where membership is on an individual
basis) who fall within the scope of the Code will be expected to commit, using
the Statement or similar, to their adherence in order to achieve and maintain
FXC membership. Appropriate transitional arrangements will be in place and
central banks are consulting with their FXCs on the precise requirements.”

As reported in the latest issue of Profit & Loss, alongside the launch of the Code, a global FX
committee (GFXC) has been formed from members of the regional FXCs. This body
will be responsible for the maintenance and development of the Code, as well as
for participants’ adherence.

The GFXC will assess regularly whether there are new market
developments that warrant incorporation into the Code. Where appropriate, it
will consider updating the Code to address these areas, consulting with the
local FXC memberships in the process.

On a less frequent basis, the GFXC will oversee a more
comprehensive review of the Code in line with the process that has been adopted
in drafting the Code, namely opening it up to comments from market participants
through their local FXCs and potentially through other avenues. The effectiveness
of the adherence mechanisms can also be reviewed on a similar timetable.

The GFXC will also monitor the success of the Code following
its publication and says this success will be measured in terms of progress on
a number of dimensions such as the awareness by market participants, their
commitment to the principles of the Code, their pace of implementation of the
Code, and the impact of the Code on market practices and transparency in the FX
market.

The GFXC will use a broad survey of market participants to
monitor success. It is expected that the survey will take place on an annual
basis, with the first such being conducted shortly after the Code publication
to act as a baseline for monitoring progress. The GFXC will review the results
of the survey, which will inform the discussions and could serve as an input to
the regular assessment of the necessary changes to the Code.

In addition, and demonstrating what they say is their
ongoing commitment to the Code, the Governors of BIS member central banks have
recommended that the BIS Markets Committee assesses the effectiveness of the
Code following its adoption.

The assessment is expected to take place approximately three
years after the launch of the Code in May 2017 and be conducted in consultation
with the GFXC. The assessment would take into account issues such as: the
breadth of adoption of the Code, the effectiveness of adherence mechanisms, the
extent to which behaviour in the market has changed and the effect of the Code
on market functioning.

“Given the Code’s voluntary nature it will only be effective
in strengthening conduct standards if market participants from across the FX
Market embrace, adopt and adhere to it,” the FXWG concludes.

Colin_lambert@profit-loss.com

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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