Looking ahead: Ankur Pruthi on the FX Global Code then, now and in the future

Ankur Pruthi, head of FX at Norges Bank Investment Management (NBIM), sits down with Laurie McAughtry to discuss his role in the development and ongoing upgrade of the FX Global Code. 

Ankur Pruthi is one of the most influential traders in the FX world, and one of the most experienced. He joined NBIM almost a decade ago to set up the firm’s foreign exchange trading desk, which launched around seven years ago, and where he runs a trading book  – for one of the biggest asset managers in the world. All FX flow for NBIM funnels through Pruthi’s book, and he prices all internal clients and then lays off that risk. Sitting in the fixed income division and reporting to global head of fixed income trading Malin Norberg, Pruthi has traders sitting in Singapore, London, Oslo and New York. It’s a big team and a big job. 

Long-term strategy

“What we’re doing here is trading out the residual risk,” he explains. “We’re not involved in managing the fund’s investments, so we have a slightly different focus and time horizon. We manage the foreign exchange execution risk, we’re not making five-year decisions, we’re just trying to lay off risk profitably.” 

However, with the recent interest rate hikes, inflation, the energy price shock and other adverse market conditions, the last year has been interesting, to say the least. 

“Since around 2010s we’ve had very low volatility, so we’ve had a very successful trading strategy where we’ve been extremely patient and passive. There was no reason for us to jump onto any prices, we could just wait, let the market come to us, and keep our execution costs low. It has been a profitable strategy, but things can clearly change. There is of course this risk that your strategy isn’t suitable all the time – we are not dogmatic, we won’t sit patiently waiting to buy US dollars as the market runs away from us. 

“Our strategy is still working well in developed markets, but in emerging markets we are pivoting slightly, looking to build some capability and see how we can perhaps lay off risk somewhat differently to how we have in the past. In DM we can be incredibly patient, passive, and let the market come to us. In EM, it is no longer so easy, and that’s where we are seeing some challenges.

“We’ve also relied on our liquidity providers for risk prices perhaps a little more than we’ve done in the past – they are much better equipped than we are to lay off risk when markets are fast. We try to be fair to them in terms of clip sizing, spacing, and so on, and in return we rely on them to provide tight prices so that we can get out when we need to.

“Spreads are definitely somewhat wider right now, which is natural when volatility is higher. In the current regime, we have to be very careful in assessing liquidity and an LP’s risk warehousing capabilities – when the market is not moving, anyone can make a tight price in $100, but when it’s moving 50bps in two minutes then it’s a whole different ball game. 

Global code

These challenges notwithstanding, Pruthi is firmly focused on how to grow, develop and protect the FX market – and to that end, has been heavily involved in the development and publication of the FX Global Code, a principles-based set of guidelines for the industry developed following the series of heavy regulatory fines for misconduct in the mid 2010s. 

“FX is a difficult market to regulate because there is no regulator as such,” explains Pruthi. 

Back in 2015, BIS Markets Committee set up a group of senior market participants called the Market Practitioner’s Group (MPG), led by former deputy governor of the Reserve Bank of Australia Guy Debelle, which was given the task of establishing best practice for the FX community. The group decided to develop a principles-based code, because principles are difficult to arbitrage. 

“You can have as many rules as you want, and people will always find ways around them,” pointed out Pruthi. “But a principles-based code that covers as much ground as possible is much harder to circumvent. We spent probably three years thrashing out what those principles should be – with an initial focus on the ground highlighted by regulatory failings.”

The 2017 version of the code came out with 55 principles, with NBIM as the first buy-side signatory. The ownership of the code has now been transferred to the Global Foreign Exchange Committee (GFXC), made up of 18 central banks from across the world, with each bank bringing in a private sector representative. Pruthi is now the GFXC member as the ECB’s private sector representative, and as such has played an instrumental role in developing the latest version of the Code, which came out in 2021. 

“The first version of the code was fairly well received, but there were still some questions around certain topics. The idea was that the code should become a living document, so in 2019 we started working on the new version, adding in some of the things that the market was asking for, such as more guidance in pre-hedging, anonymous trading, disclosures, transaction cost analysis (TCA) and so on. 

“The 2021 version also strengthened its guidance significantly on last-look hold times [a practice whereby a participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price], and as a result most liquidity providers have removed hold times altogether. This has been the biggest discussion in the FX market for the past five years, and the updated guidance should make the whole market fairer. 

“If you read through the code, and through LP disclosures, you’ll see there’s a spectrum there. But disclosure information is now all available at a central repository, all you have to do is click to understand how your flow is handled. This is tremendous from a transparency perspective.”

Progress has also been made in the field of algo disclosures and TCA templates – not all of which may have been published widely yet, but many LPs have done this already. And there are also now venues which are curating liquidity pools with code compliant liquidity – meaning that every participant in the pool has signed up to the code – a huge step forward. 

“All in all, there has been some solid progress made over the past few years,” says Pruthi. 

Looking ahead

So what still needs to improve, for the next round of updates?

“The idea is to keep pace with the markets. But the bar to make changes to the code shouldn’t be too low. Any division or addition to the code triggers a huge amount of work for all signatories – my own trading compliance team spent the best part of six months before we could realistically attest to the code. We shouldn’t take that lightly.”

That being said, GFXC will conduct a survey among market participants in Q3 and this is likely to be used to see if there are any immediate gaps that need filling. At present, the survey plans to focus on the effects of the July 2021 revision, and reflect on the impact of those changes. But there is still some work to be done. 

“I think there is less awareness in general around algo disclosures and templates, and that needs to change. If we could get to a place where all counterparties have a standardised disclosure, that would make it much easier for a buy-side participant to make comparisons. 

“We also want a robust, fair, openly transparent FX market, and that can only happen when data access is democratic. At the moment there are data haves, and data have-nots, and that is something the GFXC leadership is actively considering at the moment.”

So how should FX heads of desk be preparing their desk for any changes? 

“You know, it’s more about making your traders aware of all the changes that have been made, make sure they have access to all the disclosures and that they understand the implications of their execution choices. The code provides a framework to evaluate these execution choices and helps you to know what to expect from your counterparties and liquidity providers.”