The FX Working Group (FXWG), put together by the Bank for
International Settlements, has today released the first stage of the new Global
Code of Conduct.
The Code comprises a set of global principles of good
practice. The intention is that it will provide a common set of guidelines to
promote the integrity and effective functioning of the wholesale FX market.
Today’s release should be seen as an important step in a
much longer process that will, as the FXWG says, lead to a “robust, fair,
liquid, open, and appropriately transparent market in which a diverse set of
market participants, supported by resilient infrastructure, are able to
confidently and effectively transact at competitive prices that reflect
available market information and in a manner that conforms to acceptable
standards of behaviour”.
At this stage, it does not impose legal or regulatory
obligations on participants nor does it substitute for regulation. The FXWG
says rather it is intended to serve as a supplement to any and all local laws,
rules, and regulation by identifying global good practices and processes.
“The Code recognises that principles rather than
prescriptive regulations are the most effective way to change behaviour and
encourage responsible participation in the FX market, drawing on the principles
of the ACI Model Code in addition to the Bank of England NIPS Code and the
guidelines of the UK’s Fair and Effective Markets Review,” says David Clark,
chairman of the Wholesale Market Brokers’ Association and honorary president of
the ACI (once known in the UK as the Forex Association).
As it stands, the Code focuses on six guiding principles:
ethics, governance, information sharing, execution, risk management and
compliance, as well as confirmation and settlement processes.
Not surprisingly, the FXWG says that market participants are
expected to behave in an ethical and professional manner to promote the
fairness and integrity of the FX Market. They are also expected to have robust
and clear policies, procedures, and organisational structures in place.
Market participants should be clear and accurate in their
communications and to protect confidential information to promote effective
communication “that supports a robust, fair, open, liquid and appropriately
transparent FX market.”
This clearly a response to the problems that arose from the
use of various chatrooms. What is also perhaps telling, according to sources,
is that much of the new Code is built on the foundations of the ACI Model Code.
Once, it was almost obligatory for any FX professional to
belong to the ACI and sign up to its practices. But as one respected industry
source says, virtually an entire generation of FX dealers went missing from the
adherence as the banks effectively stopped supporting the ACI. As a result,
many bad practices were allowed to evolve.
This now looks likely to change. And while sceptics may well
question how the Code will be implemented so that it does have teeth, it is
probably wise to grasp that the era of extremely loose self-regulation is over
As Marshall Bailey, the ACI’s president says, the
organisation’s “Code will continue to exist for the time being, as it remains
the code of choice for many market participants around the world, and covers a
broad range of topics. As the BIS Code enters its second phase, most of these
topics in The Model Code will also be incorporated, and we expect the BIS
Global Code to be the global code of conduct for all.”
Naturally, there are also guidelines on execution. FX participants
are expected “to exercise care when negotiating and executing transactions in
order to promote a robust, fair, open, liquid, and appropriately transparent FX
They are also are expected to promote and maintain a robust
control and compliance environment to effectively identify, measure, monitor,
manage, and report on the risks associated with their engagement in the market.
This should not come as any surprise, and it is something most banks have been
putting in place for the past few years. ?
The Code’s final principle covers the post-trade
environment. Again, the requirements are fairly obvious. Nonetheless, they have
been stated clearly. FX participants are expected to put in place robust,
efficient, transparent, and risk-mitigating post-trade processes to promote the
predictable, smooth, and timely settlement of transactions in the market. ?
As mentioned above, the FXWG stresses that the Code should
not be used in isolation. It states that FX participants must be aware of, and comply with all the laws, rules, and
regulations applicable to them and the FX markets in which they do business.
“This Global Code
should serve as an essential reference for market participants when conducting
business in the wholesale FX markets and when developing and reviewing internal
procedures,” the Code states. “It is not intended to be a comprehensive guide
to doing business in the FX market.”
However, the Code
has very much been written with all wholesale market participants in mind. It is
expected to apply to everyone active in the market, including sell-side and
buy-side entities, non-bank liquidity providers, operators of trading venues
and other entities providing brokerage, execution, and settlement services.
“While there can be
no universal ‘one-size fits all’ approach, given the diversity of the market,
the Global Code is intended to establish a common set of guidelines for
responsible participation in the market,” the FXWG states.
The Code remains a
work in progress, and this release, while eagerly anticipated, is interesting
as much for what is not in the document as what is. The crucial areas
surrounding adherence and governance are slated for the second stage are due
for release in May 2017 and the FXWG also issued an update on that today – see the
separate story on Profit & Loss.
The FXWG is now believed
to be about to start work on additional principles that take into account the
nuances of electronic trading, also an important step given the majority of
tickets are now processed in this fashion.
So far, the Code has
been well received by various FX industry bodies. “The new Global Code is
welcomed as our industry strives to reclaim the ethical high ground; we fully
support the efforts of regulators and market participants to ensure that standards
of conduct are applied,” says Morgan
McDonnell, ACI UK President
Washington-based Foreign Exchange Professionals Association (FXPA), “praises
the global coordination and work of the Bank for International Settlements’
Foreign Exchange Working Group in strengthening global standards for those
operating in the FX market.”
It adds: “This has
been an enormous undertaking, done at a tremendous pace, and FXPA welcomes
today’s release of the Global Code and will support the adoption of its
Finally, James Kemp,
managing director of the GFMA’s Global FX Division says: “The Global Code of
Conduct was created as a result of strong central bank and industry desire to
build confidence in the FX market and to develop globally consistent guidance
that covers all market participants…This is an opportunity for global market
participants to demonstrate that they can put the right controls and guidance
in place that are consistent with the principles of the code.”