Buy-side rejects “redundant” move to expand MAR to spot foreign exchange

Asset managers have poured cold water on plans to expand MAR to include spot FX due to the impact of the FX Global Code of Conduct.

Asset managers across Europe have agreed that EU authorities should not expand the Market Abuse Regime (MAR) to include spot FX markets, as the FX Global Code of Conduct renders the move redundant.

In response to a consultation from the European Securities and Markets Authority (ESMA) considering an extension to MAR, the industry largely rejected the proposal to include spot FX transactions within the regulatory framework due to progress with adoption of the FX Global Code of Conduct, which was introduced in 2017.

“We see no overriding need to extend the scope of MAR to include spot FX contracts: Spot FX is so liquid that there is limited scope for inside information and its global nature would mean that the imposition of EU rules may be ineffective, or detrimental,” said the Investment Association, representing members managing more than £7.7 trillion of assets, in its response. “The wide-spread adoption of the FX Global Code of Conduct would render any such extension, to a large extent, redundant.”

Launched in October, ESMA’s consultation noted that spot FX may not be suited for MAR due to the size, functions and over-the-counter nature of the market. The market does not necessarily have the characteristics for the industry to meet systems and controls, transparency and reporting requirements.

At the same time, however, ESMA highlighted the misconduct related to the G10 spot FX market in 2014, which saw the Financial Conduct Authority, Bank of England and HM Treasury agree that a market abuse regime, including some features of the MAR and MiFID II frameworks, should be implemented across the market.

“The FX Global Code of Conduct has already achieved progress in promoting higher standards in the wholesale FX market around conflicts of interest, handling of confidential information, transparency and execution,” stated Invesco in its response. “It will be reviewed by the Global FX Committee in 2020. We believe it would advisable, therefore, to await the outcome of the forthcoming review before considering the appropriateness of extending the application of the MAR to spot FX contracts.”

Although not a legal or regulatory requirement, the FX Global Code of Conduct was established as a set of guidelines for market participants addressing a variety of major issues including ethics, governance, execution, information sharing, risk management, compliance, confirmation and settlement.

Buy-side adoption of the FX Global Code has been slower than that on the sell-side, with many asset managers questioning the relevance of the Code for their business, and some labelling it as being ‘regulation in disguise’.

“As ESMA rightly notes the FX Global Code of Conduct developed by central banks and market participants from sixteen jurisdictions around the globe has already achieved progress in promoting higher standards in the wholesale FX market,” the European Fund and Asset Management Association, responded.

“We therefore encourage ESMA to: Allow the market to use the reformed Code for a couple of years; and subsequently. [And] evaluate whether it is necessary to supplement the Code with public policies, derived from other pieces of Financial regulation such as the Payment Service Directive or the Anti-Money Laundering Directive.”