The Impact of the FX Global Code: Good, but More to Do

The Global Foreign Exchange Committee (GFXC) has issued a paper on the results of a survey it conducted with the intention of measuring the baseline level of awareness and adoption of the FX Global Code by market participants.

The survey was undertaken at the end of September 2017 and sent to more than 500 FX market participants globally, including firms not involved in the creation of the Code. The survey was conducted with the objective of gathering a diverse set of views from firms representing different jurisdictions, sectors, sizes and levels of activity in the FX market.

The GFXC says the high response rate, around 67%, makes the survey an important input for the GFXC when targeting efforts to promote and update the code. “Given the usefulness of this year’s survey, it was agreed that the GFXC would undertake the same initiative in 2018,” it states.

The key findings of the survey were over 83% of respondents indicated they have read some or all of the Code in the five months since it was launched in its full version. Statements from central bank-sponsored FX committees was most responsible for this visibility, with 35.2% of respondents citing this as their information source, however other central bank/local authority channels also played a major role at 31.84%.

Highlighting the broad spread of participants in the creation of the Code, 25.7% of respondents say they were aware of the code because their firm was involved in the process, however over 23% became aware at industry events.

The survey does highlight the amount of work still to be done by the FX industry, because while survey respondents were generally positive about their experiences of existing ethical and professional standards and appropriate treatment of confidential information in the foreign exchange market, when it comes to the controversial subject of last look, mark up and pre-hedging the experience was different.

Less than half, 48.32%, of respondents said they were “always” or “often” happy with the transparency around last look practices, while 49.44% felt the same on mark ups and only slightly more, 52.24% were happy with transparency around pre-hedging practices. For comparison – and to highlight the work still to be done to rebuild trust, 62% were happy with reference rates such as highs and lows; 81% were Ok with how confidential information was handled; 87.7% were happy with transparency around order handling; and almost 90% were always or often happy with the training and ethics and principles of their counterparties.

The good news for the GFXC is that the initial focus of the Code – building transparency and trust around orders and information – has been a success.

There was further good news in the positive energy around the code, with the vast majority of respondents to the survey believing the FX Global Code would improve behaviours and market practices in the foreign exchange market – although while the answers to the same areas as above elicited responses around 90% and above, it was noticeable that on last look, 88.83% believed the Code would improve behaviours in this area, the lowest rating.

When asked how well staff in their firms understood the Code’s principles, 28.33% said “very clearly”, while 42.74% answered “mostly”; 15.64% said “somewhat” and 12.29% said their staff had not read the Code. This latter group probably represents the groups the GFXC is focused on meeting – those operating in peripheral areas and demographics, such as small corporates.

While 31.84% say their firm has begun to adopt the Code and 29.89% say their firm intends to adopt it, only 11.45% had actually fully done so. Interestingly, 20.11% of respondents, 72 in total, said their firm had not yet decided whether to adopt the Code or not, while 1.12% said their firm would not adopt it and 5.59% said it was not relevant to their firm.

More than 70% of firms had taken instigated a staff training and education programme and just over 68% had incorporated the Code in their internal policies and procedures. Around one third of respondents said their firm had linked staff performances to adherence with good practice and was given regard to Code adherence in their counterparty policies. Meanwhile, 52% had performed gap analysis on their existing practices, but 24 respondents had done nothing.

A big element of the Code’s adoption is the Statement of Commitment that firms are being asked to sign – they are expected to sign up before May 2018 and the survey found that just over 8% (28 firms) had finalised their Statement, while 49.7% said their firm intended to do so. Interestingly, and this probably reflects the legal teams’ involvement, over 36% of firms said they had not yet decided whether to sign the Statement of Commitment, while seven firms said they were not going to sign the Statement and 11 firms said it was not relevant.

When asked about the factors affecting the time frame of signing of the Statement of Commitment, 55% cited the expectations of the central bank of FX committee and 53.9% highlighted “institutional complexity within my firm”.

Although there has been much noise around public registers for those firms signing the Statement, only 36.92% of respondents said they planned to upload it to such a register, while 23.59% said they did not plan to publish it or communicate it to the industry. The majority, 55.39%, said they planned to provide it to counterparties and/or clients upon request, while 22.56% said they would provide it to all counterparties and clients.

Food for thought for the GFXC comes in the 12 firms (38.71%) of respondents who said they are not considering adoption or using the Statement of Commitment because their firm thinks the FX business’ size does not warrant it or that their firm “is not aware of any expectations from our counterparties to require adherence or a SoC”. Two firms responded that their firm did not think the cost of adherence would balance the benefits to their business – it will be interesting to see how that develops, while nine firms said they were not aware of the Statement as an annex to the Code.

For those questioning the benefits of signing a Statement of Commitment, the survey also finds that 60% of respondents will “scale down” their relationship until a SoC is provided and 6.55% will cease trading with that counterparty – 33.45% say being a non-signatory will have no impact on the relationship.

Overall the survey highlights that while the Code has made a strong start in permeating the consciousness of the FX industry, more work still needs to be done – specifically it would be interesting to delve deeper into the reluctance of some to actively promote, use and adopt the Code’s principles.

Today’s issuance of the revised language on Principle 17, regarding last look, may help bring a few more parties to the table, but it remains clear that the GFXC has more to do to build coverage in both industry segments and, probably, geographies.

Twitter @lamboPnL

Twitter @Profit_and_Loss

Colin Lambert

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