FX Global Code of Conduct
The FX Global Code of Conduct was introduced following the discovery of rigging scandals by some of the world’s largest banks including Barclays, Deutsche Bank, JP Morgan, Citigroup, UBS and RBS, among others, resulting in billions of dollars’ worth of fines.
In particular, the practice of last look and the ability for a bank to see a customer's orders and/or aggregate many customers' orders and then trade in front of the order(s) was being abused.
The Code was launched in May 2017 and set out guidelines for good practice and behaviour in the FX market. It contains 55 principles covering ethics, governance, execution and transparency, information sharing, risk management, confirmation and settlement and future market development such as algorithmic trading.
Adoption of the code is voluntary but to date take-up has been good amongst central banks, sell-side banks, non-bank liquidity providers but only some asset managers have signed. In Australia, all five of the major banks, the RBA and two asset managers have signed.
A recent study by NEX Markets (EBS), has shown that average hold times and reject rates have reduced since the Code has become widely adopted by the liquidity providers. However, it is unclear whether these improvements are solely due to the Code or are attributable to technology stack improvements that has allowed improved risk management and/or implementation of algorithms to service client orders.
A recent speech by Andrew Hauser of the Bank of England discussed why the buy-side should adopt the FX global code. In seeking to understand why the buy-side have not signed up to the same extent as the sell side, Hauser focused on four explanations:
1. lack of awareness
2. lack of relevance
3. no business case
4. costs of signing and implementing the code
In addition to ongoing concerns with last look, lack of relevance to the buy-side is driving the slow adoption as both subsequent points (three & four) above are driven from that lack of relevance. In particular, as the buy-side are the order generators, issues of fairness and transparency don't apply as the buy side already has a clear fiduciary duty to their clients. Hauser's other points with regard to market disruption and hindering the price discovery process are also irrelevant to the buy-side's goal of minimising implementation shortfall.
Hauser does mention that the Global FX Committee and the Investment Association in the UK are working to simplify the rules to ensure the adoption by the buy-side is simpler and easier. In addition, the regional FX committees have made their membership conditional on a commitment to the code so I expect more buy-side institutions in Australia to sign. However, improvement of the last look clauses will still be necessary for the majority of buy-side institutions to adopt the code. The introduction of the Bank Executive Accountability Regime (BEAR) for the sell-side may also help that process.
Let me be clear, I think the FX Global Code is extremely useful and speaks to the future of regulation in its focus on good behaviour and practice rather than just using the stick of enforcement. Logically, a focus on minimising breaches will result in less numbers of breaches and therefore enforcement actions.