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.”
However, while other countries may not be looking to give legal teeth to the Code via laws like the SMR, there is a common view in terms of the way regulation is going, says Clark. “Regulation is moving on in a much more prudential direction, towards the concept that firms must be responsible for their own behaviour. That's a definite change compared to where we were two or three years ago,” he says.
Kemp agrees: “The focus on personal accountability is coming through more and more in regulatory discussions, for example at both the Financial Stability Board and the International Organization of Securities Commissions, including discussion as to what mechanisms might be used to create that accountability.”
Clark believes this approach will prove more effective at uncovering or deterring bad behaviour. “It is easier for central banks to initiate adherence to Codes of Conduct rather than regulators who have to observe rules that are legislated for,” he says. “Rules that are hard and fast can often be stepped around but the spirit of a Code is observable by all. The whole industry is behind this Code – it’s harder to defy than a piece of legislation; the law is set in stone, which means you can go around it.”
Clark adds: “I think eventually we will see the FEMR go global, while the Code of Conduct will be rolled out to other asset classes beyond FX.”
However, whether the issues the FXWG has been working on will be transferable to other asset classes remains to be seen. FX and fixed-income primary issuance, for example, are very different, and while broader principles such as 'treat your client well' will be applicable, more detailed guidance may be less so. Time will tell whether the code will form the basis for broader guidance, or whether it merely provides a template for the approach other asset classes can take in their own codes.
But at least within FX, observers are confident the Code will create a level playing field, with financial institutions, rather than legislation or regulation, driving consistency between countries.
“Many of these financial institutions run global businesses,” says Kemp. “Dealing with different rules in different jurisdictions is complex. I’d expect that when it comes to conduct the preference would be to roll out key areas such as training and surveillance, globally – especially if they are dealing with a global code of conduct. That should create a global standard.”
What will be crucial, adds Kemp, is to avoid the emergence of a two-tier code, with different standards expected, or even tolerated, between different-sized players, or between different market participant types. “The educational element is important,” he says. “The number of market participants in the FX market is vast – this has to be a code that applies to all market participants, of all sizes in every locations.”