The Global Foreign Exchange Committee (GFXC) is developing a global index of registers to help make it clearer which institutions have signed up to the global code via any one of the eight registers.
GFXC hopes to launch the index by June 27, the date of the forthcoming GFXC meeting in Johannesburg, according to Christopher Matsko, head of FX trading services at Portware, a technology vendor owned by FactSet.
David Puth, CEO of CLS, confirmed an index of registers is in the making, promising it would be easily navigable.
Central banks have been eager that the process be private-sector driven, ensuring no need for regulatory oversight, but the global scale of the FX market, the number of participants and the multitude of registers has made it a challenge.
Matsko says: “It’s not as easy today as it ought to be, especially since not all registries contain all ‘code-committed’ entities globally. The GFXC’s efforts towards a global index of registers is definitely a move in the right direction.”
The fragmentation of the registers is apt, considering the fragmentation of liquidity in the FX market itself, he adds.
It is unclear whether other possible solutions are still being considered.
David Clark, chairman of the European Venues and Intermediaries Association (EVIA), envisages “some consolidation of the registers, or a register of registers, which could be managed by a simple purpose-built market utility”.
James Kemp, head of the Global Financial Markets Association’s (GFMA) global FX division, also sees a number of possible solutions, adding: “It probably is time to consolidate with a central index, or a register of registers. I expect the work of the GFXC may mean we see progress on this shortly.”
Giving responsibility to a market utility would be simplest for the rest of the market, but would burden the institution given that responsibility with the liability for any incorrect data. Most, therefore, expect the problem will be resolved with an index, set to be announced in Johannesburg.
The latest count had close to 200 institutions officially signed up to the code, for which the deadline to sign up is Friday. While the number of signatories is not insignificant, it is a small proportion of the overall market, showing there remain many institutions involved in the FX market either waiting on the sidelines or not engaged.
Among the laggards are many EU fund managers and smaller corporates, for whom FX trading is more an afterthought than a core activity. Smaller firms face particular challenges because a certain number of people are needed to implement the kinds of processes called for in the code.
Curtis Pfeiffer, chief business officer at Pragma Securities, says: “If you look at the public registers, there are certainly fewer buy-side participants that have signed up to the code. I think there is a sense that the code was pointed towards the sell side, because that is where the bad behaviour in the FX market was uncovered, therefore the buy side feels less urgency to sign up.
“I’m sure the buy side will increase their engagement in time as the FX working groups provide more guidance and the code evolves. In time, it will become even more of an industry standard and it will be harder for any market participants to ignore it.”
Big banks have their own challenges, ensuring the multitude of processes across many divisions and locations of the bank are aligned. Each is having to find its own way of implementing the principles.
“Some have a strong HR culture, while others have a more legalistic approach,” says EVIA’s Clark. “There are jurisdictions that have a history of a more compliance-orientated approach, while others have been more supervisory and may treat it as a risk-management issue.”
In addition, some operate in jurisdictions with a single institution acting as regulator, central bank and supervisor, while others, such as the US, have many regulators, with varying levels of engagement. All of these factors complicate the implementation process.
However, at least they have the resources to commit to it.
Says Pragma’s Pfeiffer: “In some ways, it was easier for banks to align themselves with the code because they were already preparing for Mifid II [Markets in Financial Instruments Directive II], which covers some of the same ground as the code, for example around execution and transparency.”
Roger Rutherford, COO at ParFX, says: “The reputational risk of not signing up will grow over time. For now, an institution could probably make a good case for why they haven’t done so yet, because they are waiting for the final details on last look, anonymous trading and cover-and-deal to be decided by the working groups.”
Central banks hope to cajole more institutions to sign up by restricting their trading activities with, and declining participation in their FX committees for, institutions that have not signed up. However, this stick looks far more threatening for the sell side than the buy side or corporates, who are unlikely to be too concerned in the short term.
In theory, the market will encourage participation, by choosing who to trade with based on participation with the code, its penetration thereby trickling down through the different market segments across a broader range of market participants, says Kurt vom Scheidt, global head of FX at Saxo Bank.
However, for this to work counterparties need to know not just that institutions have signed up, but that they are following through on their commitment.
One idea would be for institutions to re-commit themselves to the code periodically, perhaps every couple of years, to ensure any new staff remain engaged with the principles, and to endorse any changes to the principles since they last signed.
|David Clark, EVIA|
The Financial Markets Association (ACI) believes it has come up with something more tangible, with the launch of its online FX global code certificate.
The online exam, which can be completed in an hour, is aimed at anyone involved in the FX market. It presents users with a range of realistic scenarios, teaching FX market practitioners how to navigate everyday operating dilemmas in line with the code’s principles.
The exam has been designed to teach users how to embed the code’s principles into their businesses, monitor conduct and demonstrate best practice. ACI hopes the certificate it awards on completion will be taken as evidence that institutions are taking the code seriously.
It is being marketed as an easy first step for market participants to take, with the more advanced e-learning, attestation and certification (ELAC) portal available for more advanced information.
Oliver Madden, chairman of the board of education at ACI, says: “The FCA’s [Financial Conduct Authority] recent consultation paper on industry codes of conduct talked about senior management needing to ensure that individuals working at all levels in their areas of responsibility meet appropriate standards of conduct and competence.
“ACI’s education programme aligns exactly to these twin goals. Our suite of examinations address competence, providing market professionals with the skills to do their role. The online global code certificate, together with our ELAC portal, address conduct, ensuring the principles are embedded into business practice.”
GFMA’s Kemp says: “We welcome all efforts to raise education levels and training in the market, whether in house or third party. The latter is especially useful for institutions which may not have the desire or resources to develop in-house training materials on the code.”
Clark adds: “The ACI is the most appropriate organization to help individuals as well as their institutions, and it also has links to other trade associations with corporate members. ACI is, however, better known among banks and intermediaries than the buy side.”