FX Global Code of Conduct: One year on

With 25 May marking the first anniversary of the FX Global Code of Conduct, The TRADE examines whether FX institutions are choosing to adhere to the Code and if compliance has proved difficult for some.

Foreign exchange (FX) markets have become almost synonymous with mistrust in recent years following a host of rigging scandals by some of the world’s largest and most influential financial players. Household names including Barclays, Deutsche Bank, JP Morgan, Citigroup, UBS and RBS, among others, have been found guilty of misdemeanours resulting in billions of dollars’ worth of fines and traders being slapped with significant prison sentences.

In 2015, the Bank for International Settlements (BIS) heralded a new age in FX when it began work to establish what is now known as the FX Global Code of Conduct. The Code had a clear objective of curbing the industry’s alleged, and often proven misconduct , and restore confidence in the world’s currency markets.

“The FX industry has been suffering from a lack of trust,” Guy Debelle, deputy governor of the Reserve for the Bank of Australia and head of the BIS FX working group, said shortly following the launch of the Code. “This lack of trust is evident both between participants in the market and, at least as importantly, between the public and the market. The market needs to move toward a more favourable and desirable location, and allow participants to have much greater confidence that the market is functioning appropriately.”

With 55 principles addressing a variety of major issues including ethics, governance, execution, information sharing, risk management, compliance, confirmation and settlement, the Code is an extensive, coherent set of guidelines.

Officially launched on 25 May 2017 in tandem with widespread support from FX market participants and industry bodies, it does not impose a legal or regulatory obligation for compliance. The BIS reiterated that despite this, it expects the principles in the Code to be understood and adopted across the industry, with firms taking practical steps such as training staff and putting in place appropriate policies and procedures to ensure compliance.

By April 2018, the Global Foreign Exchange Committee (GFXC) announced that more than 100 financial institutions had provided statements of commitments to the FX Global Code, including investment banks such as Barclays and Deutsche Bank, both of which have been embroiled  in  FX rigging scandals over previous years. Despite 100 firms representing roughly 1% of the FX market, in terms of volume it’s closer to 60%, suggesting the impact could be significant in years to come.

Tarnished reputations

Various technology vendors, consultancy firms and industry associations have stepped up to the plate since the introduction of the Code to help firms meet its demands, and for some institutions this has clearly been a substantial challenge

“When the FX Global Code was first announced the BIS FX Working Group anticipated that it would take firms between six and 12 months to adhere,” says Nick Downes, co-founder of consultancy firm Axiom Global Advisors, which was founded with the sole purpose of helping with industry faithfulness to the Code.

“But now a lot of firms realise that adherence is difficult to achieve and touches multiple parts of their businesses – that’s why the number of firms publicly adhering is only around 100. It is an industry standard, but in terms of numbers that is very small.”

In a general sense, the FX Global Code is already shaping up to be an important reference point for market participants just 12 months into its lifespan. This has been driven by the larger players in the FX industry, many of which were caught up in rigging scandals, as they seek to cleanse their somewhat tarnished reputations.

“To date, the global FX banks have been at the forefront, with adherence to the Code becoming an opportunity to enhance reputational and trust capital,” says Kieran Fitzpatrick, CEO of FX order management specialist Barracuda FX. “However, the Global Code also impacts the regional and country-level banks, which support clients by offering FX orders, but typically have fewer resources to manage them.

“The Code is driving change for any institution which manages FX orders, including those which have traditionally managed their clients’ FX orders on upstream provided platforms, spreadsheets or even manually.”

There can be no doubt that publicly committing to the Code has certain commercial benefits and presents opportunities in terms of demonstrating good practice. But it also comes hand-in-hand with reputational risk should an institution fail to meet the demands of the Code after announcing intentions to comply, according to Julian Gladwin, also co-founder at Axiom Global Advisors.

“Adherence to the Code is seen as a demonstration of good practice and increases client confidence in the market participant. The European Central Bank and other central banks have already ‘invited’ their FX counterparties to sign up,” Gladwin says. “However, this also highlights a reputational risk, where an institution publicly adheres, then at some point in time is shown to be in breach of some of the principles.”

Monitor, measure, maintain 

Major banks were quick to approach technology vendors looking for guidance on efficient methods of compliance with the Code. David Faulkner, managing director at Fluent Trade Technologies, a provider of FX trading systems, explains that better technology in a general sense is key for buy- and sell-side firms aiming to comply with the Code through increasing transparency and reducing risk.

“We work with many of the top tier banks, including 6 of the top 15 FX banks, and we are in the process of onboarding more. Over the past year most of our clients and prospects have asked how our technology platform can help them adhere to the Code,” Faulkner says. “The answer is that market data, plus trade and order information in microsecond resolution assists with best execution, timely risk management and provides an audit trail of all market activity.”

As an example, Principle 17 of the FX Global Code of Conduct states that market participants employing the somewhat controversial ‘Last Look’ method, should be transparent regarding its use and provide appropriate disclosures to clients. Last Look affords liquidity providers such as banks the opportunity to decline or accept a trade request, but industry bodies like The Investment Association have raised concerns recently that it is no longer acceptable due to misuse of information.

The Investment Association highlighted various misuses earlier this year, including pre-hedging during the Last Look window, and trading based on information derived from rejected trades or from a request for quotation in progress or not yet won.

Faulkner adds that minimising latency within the whole trading technology stack is key to ensuring Last Look hold times are reasonable and acceptable to liquidity providers, their clients and for adherence to the Code. Ultra-low latency connectivity also ensures that all components of pricing and booking trades are completed faster – from consuming market data and connecting with credit systems, to publishing prices and updating risk systems. “The faster a technology platform can manage risk processes, the more the risk is reduced,” Faulkner says.

For FX technology vendors and industry associations, the Code has also brought about new opportunities as firms seek efficient ways to not just comply with the rules but also monitor their compliance. Over the past year ACI The Financial Markets Association has worked to develop a testing system which enables firms to educate and test their staff on compliance with the Code. Known as the E-Learning, Attestation and Certification (ELAC) online portal, ACI offers the FX industry standardised training for compliance with the 55 principles.

“We have seen a great deal of interest from institutions which need to monitor, measure and maintain adherence to the FX Global Code and other Codes. Of equal importance is their need to demonstrate Code adherence to their regulators and clients,” Paul Chappell, ACI director of education, explains.

“Millennium Global recently adopted ELAC, becoming one of the first major buy-side firms to do so, to assist in adhering to the principles of the Global Code. ELAC provides them with an accredited and continuous professional development solution.”

The FX Global Code of Conduct is wide-ranging and compliance requires substantial time and resources. The size and complexity of the FX market adds further complication to this with various factors like regulation, risk management, counterparties, liquidity, technology and market infrastructure constantly evolving.

FX experts agree that institutions have recognised that compliance with the Code is not a ‘one-stop process’, but an on-going procedure that needs to be constantly monitored, in much the same way as compliance with mandatory regulatory regimes are. Despite the difficulty, the FX landscape will herald a new age of transparency in terms of order and algo execution thanks to the introduction of the Code, but one year on, it’s clear there is still a long way to go until the benefits of the Code can be truly realised and the shame of historic misconduct can be laid to rest.