We are now just past the one-year anniversary of the launch of the FX Global Code of Conduct, a voluntary set of principles introduced to promote integrity, restore trust and ensure effective functioning of the wholesale FX market .
This has been a unique undertaking – a public-private effort on a global scale, involving a diverse set of market participants. Given that it is voluntary, unsurprisingly, there was some initial scepticism around how the Code would work in practice. However, the fact that it has been developed by the participants in the market – including the Central Banks - means that as an industry , for the first time, we now have a globally-accepted and agreed set of principles under which the industry should operate. This common set of standards and behaviours is expected from all wholesale FX market participants, be they dealers, brokers, liquidity providers, buy-side, corporates, hedge funds or venues.
Certainly, we’ve seen the Code becoming increasingly embedded within the industry over the last year and are encouraged that the 25 global FX dealer members of the GFMA’s Global FX Division have all committed to the Code. This group – headquartered in a diverse range of jurisdictions - collectively represent close to 80% of the FX dealer market. As the code has developed, all have made significant enhancements to their conduct and control standards, processes and business models. The seriousness with which the Code is treated has meant that significant resources have been spent over the past year carrying out audits and checking that banks’ processes and policies meet the code’s expectations.
Additionally, over the last year, the understanding of the Code amongst counterparties has increased. Central Banks have been clear that they expect their counterparts to be signed up to the Code and that it is also a prerequisite of Central Bank FX Committee membership. Additionally, there is also a growing expectation from underlying asset owners that asset managers involved in wholesale FX market should both commit to the Code and in turn, look to engage with those dealers who sign up to the Code. This is a key point as for the code to be maintain its momentum and be successful, all market participants need to commit to it. It is in no-one’s interest to have a two tier market evolving of those who have signed and those who have not.
The Code’s introduction means that the industry is now in a much more robust position and clear progress is being made - as can be seen from the various registers – as market participants sign up and are now ‘living’ with the Code. We know that there is already greater dialogue between counterparties clarifying the nature of the relationship in deal scenarios, expectations of how orders will be handled and executed and how information is shared. The Code – with cross industry participation - has tackled a number of the tough “grey areas”, clarifying the acceptability of pre-hedging practices where these are to benefit the client and establishing the transparency requirements and position around “Last Look”.
However, there is still work to do. For example, the effectiveness of the Code and enhancements to participants’ processes and controls will need to be continually assessed. This assessment will no doubt involve testing programmes and audits to assess any breaches, as well as an expectation that remuneration will take into account the high standards of conduct, ethics and adherence to procedures expected of all. Furthermore, with a market as global and diverse as FX, which continually develops, and which has embraced technology with increasing levels of automated trading, the Code will need to evolve with it.
One year on, the FX industry is very clear about the path forward. It is now up to market participants to demonstrate that this private-public partnership creates a new way of working to deliver the robust, effective and well-functioning global FX market required to underpin global trade and investing