FX Working Group seeks to pre-empt blunt regulatory redress

Solomon Teague
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The global FX code of conduct being developed by the FXWG under the auspices of the Bank for International Settlements has moved a step closer to becoming a reality, with a first draft being released to market participants for feedback.

A first draft of around half of the Foreign Exchange Working Group's (FXWG) global Code of Conduct has been released to the eight FX committees representing Australia, Canada, the eurozone, Hong Kong, Japan, Singapore, the UK and the US – a substantial portion of the FX market. It has also been circulated among participants in India, Mexico, Brazil, Korea, Switzerland, China, Sweden, together making up the 15 largest FX markets, all of which are represented in the FXWG.

The FX committees will have around two weeks to study the contents and provide feedback to FXWG. That feedback will be digested and another draft released to the committees early in March, before a final version is prepared for April, ahead of its full publication in May.

David Clark, chairman at the Wholesale Markets Brokers Association (WMBA), says: "It is clear that the Code of Conduct is a top priority, there is no sense this will be like Mifid, with its endless delays – it is expected to be on time."

The FXWG was keen to break the process up into two parts, finalizing its thinking on some controversial and urgent matters this year, rather than making the industry wait for one complete document in May 2017. 

The document expected in May will provide its final thinking on execution, information sharing and some back-office and settlement issues. It pulls together work from six existing codes of conduct, filling in the gaps where none of them provided sufficient guidance, for example in order handling. 

Regulators declined to provide a copy of the draft when asked by Euromoney. The ACI Model Code is the only existing global code and one of the more comprehensive, so it provides some insight into what the FXWG might have produced. On execution, ACI advises brokers to have a clear best-execution policy to ensure execution of orders is done on terms that are most favourable to the customer. Dealers should not disclose any pre-trade information, including the direction and size of the trade, and should always disclose any potential conflict of interest. 

On information sharing, the ACI Model Code says dealers should "not, whether by collusion or otherwise inappropriate sharing of information, influence the exchange rate". and should not intentionally influence benchmark fixings. "If sharing of confidential information between FX trading/ sales and prime brokerage could materially benefit the customer, the customer should be contacted, and its written approval received, before any information is shared," it adds, while all participants should use only use their own IDs and passwords.

Guy Debelle, assistant governor of the Reserve Bank of Australia, who heads the FXWG, tells Euromoney: "We wanted to focus on some high-profile issues, to provide more timely guidance in areas where the market needs it most."

Work is already under way for the second iteration, due next year, says Debelle. "There is still a lot of ground left to cover for the second part. We have left electronic trading until the next iteration and there are a lot of divergent views on that," he says.

Observers agree that one of the biggest challenges facing the Code will be enforcement – or adherence, the term preferred by the FXWG – which will be a matter left largely to individual countries.

In the early days at least, this will mean differences remain between jurisdictions, in terms of how the Code is applied.

James Kemp, head of FX at the Global Financial Markets Association (GFMA), says: "I think we can expect different adherence or enforcement mechanisms by jurisdictions. Some jurisdictions may look to use it as guidance, while the UK looks set to enforce it with new market-abuse regulation and the Senior Managers Regime (SMR)."

The Financial Conduct Authority (FCA) has been conducting its own investigations into the currency markets as well as the broader fixed-income and commodities markets, in the Fair and Effective Markets Review (FEMR). But it has worked closely with the FXWG to ensure the guidance both will provide on FX is consistent.

According to the FCA, the SMR will "ensure that senior managers can be held accountable for any misconduct that falls within their areas of responsibilities". It will do this by imposing a legal duty on firms to ensure there are procedures in place to assess the fitness of people in positions of responsibility, and make them liable for the decisions taken within their areas of responsibility.

Alex McDonald, CEO at the WMBA, says: "In the past, where wrongdoing was alleged it has often been difficult to show that any regulatory rule or that the law has been broken, as it was easy for people to say they were 'only following accepted market practice’. The SMR formally puts conduct into the law and creates clear lines of behavioural ownership right to the top."

Clark adds: "Other countries have looked at the SMR but most seem to have concluded that it is a step too far for them, particularly in terms of its extraterritoriality, and will probably not follow."