Buyside Urged to Help Fix FX
Simon Potter, head of markets at the New York Federal Reserve Bank urged the buyside to read the new global code of conduct for foreign exchange and take an active role in improving the market.
Potter spoke on a panel in London today hosted by the Global Financial Markets Association to launch the FX Global Code which was published after a two-year collaborative effort between central banks and private sector market participants from across the globe. The GFMA promotes coordinated advocacy from three financial trade associations – the Association for Financial Markets in Europe in London and Brussels, the Asia Securities Industry & Financial Markets Association in Hong Kong and the Securities Industry and Financial Markets Association in New York and Washington.
The global code, consisting of 55 principles, is voluntary and does not impose legal or regulatory obligations on market participants but articulates accepted best practice to support a robust, fair, liquid, open and transparent market. The first phase of the code, was published in May last year.
David Puth, chief executive of CLS and chairman of the Bank for International Settlements’ market participants group, said in an email that the public perception of financial markets was deeply shaken by the financial crisis and made worse by certain behaviors in the foreign exchange market. For example, this week New York’s Department of Financial Service reached a $350m settlement with BNP Paribas after the regulator said the French bank failed to properly supervise its global FX business between 2007 and 2011.
Puth added: “We are far from done. However, I think we are in a position to begin to restore confidence, public trust and promote the effective functioning of the wholesale FX market, and ultimately build a better marketplace.”
Guy Debelle, deputy governor of the Reserve Bank of Australia, said on the panel that the new code is important as it a single code replacing all the existing FX codes and because it has been agreed by top 16 foreign exchange centres globally. He added that a Global Foreign Exchange Committee has been set up to maintain the code in the future and participants will include China, Mexico, Brazil and Korea.
Potter continued that the published code includes examples so that all market participants, not just the sellside, can think through implementation.
“The buyside should read the code and ask questions,” said Potter. “There is a responsibility for the buyside to be an active participant in improving the foreign exchange market.”
Potter added that last look was heavily debated and is one of the longest principles in the code. Last look liquidity in the foreign exchange market gives price makers the right to reject or delay an order before it is filled and is problematic in electronic trading as it is unclear whether an order will get filled at a given price quote.
Last look created controversy when Barclays Bank reached a $150m settlement with US regulators in 2015 for allegedly abusing last look. The New York State Department of Financial Services alleged that Barclays evaluated and applied its last look rejection protocols almost entirely in reference to the profit or loss the trade would bring to the bank based on price movements during the hold period. Potter continued that last look should only be used for risk control, not to gather information or where there is no intention to trade.
“In most instances last look will not benefit the client,” added Potter. “However last look may needed if a market-marker has to provide liquidity in a strained market so we have launched a consultation which closes on 21 September.”
Chris Salmon, executive director for markets at the Bank of England, said on the panel that market participants can demonstrate they taken steps to comply with the code by making a public commitment statement. In addition, central banks will also comply with the code and will not deal with counterparties who have not made a statement.
The Bank for International Settlements said in a statement that central bank governors welcomed the publication of the FX Global Code.
“They confirm that they intend to adhere to the principles of the code, and will expect the same of their regular FX counterparties, except where this would inhibit the discharge of their policy functions,” said the BIS. “Additionally, members of central bank sponsored foreign exchange committees will be expected to adhere to the code.”
Salmon added that the Global Foreign Exchange Committee expects a number of registers to be set up for commitment statements for different market segments and the committee will then set up a global index of registers.
Adrian Boehler, global co-head of FXLM and commodity derivatives at BNP Paribas, said on the the panel that the code is not a rule book but a framework for discussion between counterparties.
Boehler said: “We expect the mean time to sign statements will be between six and twelve months. There are a number of different mechanisms for firms to proportionately embed the code, such as training, and we have trained 700 staff.”
Dan Marcus, chief executive of currency trading platform ParFX, said in an email that the code aims to instil the notion of truly ethical behaviour for all participants, and outlines an effective framework that, amongst other things, promotes responsible and sustainable trading behaviour.
“These key values now need to be hardwired into the FX market,” added Marcus. “We intend to promote the code amongst our customers by encouraging them to evolve their institutions’ FX practices so they are consistent with the principles laid out in the code.”
The Wholesale Markets Brokers’ Association, whose member firms operate, arrange and execute the vast majority of the FX wholesale turnover, said in a statement that the participation of market practitioners from all parts of the wholesale markets, including banks, buyside and platforms, together with the central banks and competent authorities, gives unparalleled strength and credibility to the code and its objectives.
Potter said: “The code will not prevent one person or group acting unethically or exploiting loopholes but we want industry to call out such behaviour as soon as possible.”
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