The BIS has established an FX working group under the leadership of Reserve Bank of Australia assistant governor Guy Debelle, which will seek to create a single global code of conduct for the FX market.
| It is not clear yet how critical the contradictions are and I suspect the differences between them may not be as large as some have suggested|
It aims to draw its influence from all six existing codes of conduct that apply to the FX industry. It does not view one as inherently superior to the others, and will not use any of the existing codes as the master code, incorporating elements of the others into it.
The resulting document will attempt to be a comprehensive code offering guidance on all aspects of the FX market, including how to handle stop loss, order flow and last look. It will apply to all practitioners in the market, including sell side and buy side, technology companies, platforms and non-bank financial institutions.
Debelle says: “The committee will essentially continue the work that is already being done by the existing FX committees, but with a broader scope.”
Those FX committees, of which there are eight, represent a large proportion of the global FX market: Australia, Canada, the eurozone, Hong Kong, Japan, Singapore, the UK and the US. The committees last met in Tokyo in March, where the topic of a harmonized code of conduct was discussed.
Debelle says the substantive difference between the old committees and the new working group will drive the creation of a single, global code of conduct, adding: “This is a path we were already edging down, but this move accelerates that journey.”
Market participants have been supportive of the idea of a harmonized code.
James Kemp, managing director for global FX at the Global Financial Markets Association, says the coordinated alignment of the regional codes of conduct “will help reduce duplication and create a common reference point for the industry on a global basis”.
He welcomes the “opportunity for market participants to work with regulators and supervisors to demonstrate that they can put the right controls and guidance in place”.
Specifically, a number of respondents to last year’s Fair and Effective Markets Review consultation raised concerns about contradictory guidance. It remains unclear exactly what aspects of the six existing codes of conduct relating to the FX industry are contradictory – even to Debelle.
He says: “It is not clear yet how critical the contradictions in the existing codes are and I suspect the differences between them may not be as large as some have suggested. It may be they are essentially a matter of wording, but if there are substantive differences we have a mandate to address these.
“There may be local considerations that are relevant here, justifying some discrepancies, but there is no reason the majority of the code should be applicable globally.”
Debelle agrees a single, global common code of conduct is a desirable goal for the FX industry.
“Our job will be to look at all six existing codes and identify what is missing, and fill in the gaps, as well as to resolve any areas where there is conflicting guidance.
“The code will be principles-based – it will not be regulation – but recent scandals have shown the need for guidance showing what is and what is not appropriate behaviour for practitioners in the FX market.”
|Benedict Cheng, GreySpark|
“The onus of implementing sound trade surveillance framework is and should remain with the participants.”
Cheng calls for the final code to “detail more precisely and explicitly the extent to which information-sharing between market-makers is or is not allowed”, as well as, where appropriate, including “specific provisions on the execution of foreign-exchange transactions, including fixing orders”.
However, Cheng sounds a note of caution about implementation.
“Given the different regulatory landscape and legal framework of countries, particularly in the Asian region where some currencies are restricted, coupled with various degrees of regulatory sophistication, it will be interesting to see how this common code will finally be introduced,” he says.
Debelle acknowledges this concern, saying: “The working group will also look at ways it can promote adherence to the code, which may be as big a challenge as the job of creating a single code itself.”
Marshall Bailey, president of the ACI Financial Markets Association, believes his organization – the creator of one of the six codes to be consolidated by the BIS – can help, by offering its e-learning and certification (ELAC) portal.
“Due to the availability of the ACI ELAC portal, we can help facilitate this important move through technology that allows both the agreement of which components to be in the code, as well as the important elements of providing a platform to demonstrate adherence,” he says.
“Measuring and monitoring progress is key to behavioural change, and institutions need to have clear guidance on the procedures and steps required to ensure any knowledge or conduct gaps are swiftly addressed by supervisors.”
Bailey adds: “How this can potentially be monitored and implemented effectively is also a key area of focus of the industry, and something the ACI outlines and addresses in great detail.”
The committee has not set itself a timetable within which to complete its work, though Debelle expects to be making demonstrable progress within 12 months. He promises the committee will be transparent with its work and will draw comment from industry as it goes.
“We will not work behind closed doors for two years and then produce a completed document that nobody has ever seen,” he says.
The committee will report to central bank governors.