5 June, 2017
A new code of conduct for wholesale foreign exchange (FX) market participants has been developed, with the backing of global financial watchdogs and the world’s highest profile central banks.
Although voluntary, the code of conduct is intended to establish a common set of guidelines for good practice in the FX market, which has a turnover of more than $5 trillion per day. It is made up of 55 principles that cover areas such as ethics, transparency, governance, information sharing, risk management, compliance and electronic and algorithmic trading.
The code was developed over two years by the central bank Foreign Exchange Working Group (FXWG), working with a private sector market participants group hosted by the Bank for International Settlements (BIS) in Basel. FXWG members include the Bank of England, European Central Bank, the Federal Reserve Bank of New York and China’s State Administration of Foreign Exchange.
“All of us recognise the need to restore the public’s faith in the foreign exchange market,” said FXWG chair Guy Debelle, deputy governor of the Reserve Bank of Australia. “We share the view that the global code plays an important role in assisting that process and in helping improve market functioning.”
Governors of the various central banks said that they would expect their regular FX counterparties to adhere to the principles of the code, “except where this would inhibit the discharge of their policy functions”. They have encouraged market participants, particularly those in the private sector, to evolve their practices in line with the principles of the code and to demonstrate their commitment to its standards through the use of the ‘statement of commitment’ produced by the FXWG.
The group has also published a ‘blueprint’ for achieving widespread adherence to the code (9-page / 120KB PDF) and to ensure that its principles remain up to date as the market evolves. The code will be maintained and updated by a new global foreign exchange committee, made up of public and private sector representatives from the foreign exchange committees of 16 international FX trading centres.
In a statement, the UK’s Financial Conduct Authority (FCA) said that it expected adherence to the code from its regulated firms and their senior staff.
“As we set out in our Mission, standards can be a useful way for the industry to police itself in support of our regulatory work and can help firms to communicate expectations of individuals when linked to the Senior Managers and Certification Regime,” it said.
“We expect firms, senior managers, certified individuals and other relevant persons to take responsibility for and be able to demonstrate their own adherence with standards of market conduct. Our supervision of the SMCR rules supports this,” it said.
The first principle to which market participants that sign up to the new code commit to is to “strive for the highest ethical standards”. The code also sets out how to tackle conflicts of interest, and the need for pay and promotion policies to “promote practices that are consistent with ethical and professional conduct”.
The code does not ban the use of a practice known as ‘last look’, which allows market participants to back out of losing trades. Instead, participants should be “transparent” about their use of the practice and provide appropriate disclosures to clients. The new global foreign exchange committee is seeking further feedback on the use of the practice, which will be used to inform future versions of the code.
For further information, please contact:
Ian Laing, Partner, Pinsent Masons
ian.laing@pinsentmasons.com
