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In 2015, BIS Governors commissioned its Markets Committee to develop a single, global code of conduct for the wholesale FX market. A key objective of this commission was to help restore trust and confidence in the FX market following a number of high profile FX misconduct cases that came to light in 2013 and 2014.
The establishment of the FX Global Code was facilitated by the Foreign Exchange Working Group (FXWG), which consisted of central banks from 16 jurisdictions around the globe. The work was supported by a Market Participants Group (MPG), which drew from market participants spanning the sell-side, buy-side and FX infrastructure providers across these regions.
According to the Global Foreign Exchange Committee (GFXC), the complete Global Code was published in May 2017. It is a set of global principles of good practice in the foreign exchange market. It contains 55 principles that provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market. The principles cover ethics, governance, execution, information sharing, risk management and compliance as well as confirmation and settlement.
Eric Donovan, Global Head of Institutional FX, StoneX, said the Code has generally been positive for FX markets, though it has not been nearly as “impactful as some had predicted”.
Many discussions around the FX Global Code begin with an assumption that the FX markets were poorly functioning and in need of major reforms, however quite the opposite is true, he said.
“FX markets have been among the most highly liquid, well functioning markets in the financial system. The bank prime broker system and de-centralized trading model (which has literally evolved over 500 years) works exceptionally well,” he added.
Donovan further said that the benefit has been an agreed upon standard across almost all major sell-side participants, driving out some practices (last look) which put market participants at a disadvantage, and generally raising awareness about the de-centralized nature of global FX markets.
In the July 2018 Traders article, it was cited that the buy-side could get more involved in adopting the FX Global Code – and soon.
According to Eric Huttman, CEO of MillTechFX, when the FX Global Code was first introduced, the big focus was on whether firms would adopt and adhere to a voluntary code.
There are now over 1,100 signatories to the Code, he said, and so the conversation has moved on to actual issues within the market such as last look and TCA, which demonstrates that the code is now embedded and sparking important debate.
However, the buy-side only accounts for 12% of FX Global Code signatories, representing a small increase from 9% in 2019.
“The relatively low numbers of signatories from true end-users of FX likely indicates a lack of awareness of the code itself from this key group of market participants,” Huttman commented.
Donovan added that there are legal and administrative costs associated with adhering to a rather complex code of conduct.
He said there are also perceived liabilities for firms that may have many touch points on the FX markets, and fear they may inadvertently violate some obscure part of the code somewhere in their organization- even if they are very consistent with the code in spirit.
“These costs and risks carry no benefit to the buy-side, so it’s a simple decision for most organizations,” he stressed.
Donovan has not been convinced that encouraging and supporting buy-side adoption of the Code is a “worthy goal”.
“If the sell-side adheres to the code, then what benefit is achieved by encouraging and supporting the buy side to do so?” he asked.
Meanwhile, Huttman believes more buy-side firms signing up to the Code will lead to a fairer and more transparent FX market, adding that more needs to be done to increase awareness of the Code among buy-side firms to enable them to scrutinise their liquidity providers and partners’ processes against best practice.
“The GFXC should explore requiring signatories to review and renew their commitments to the FX Global Code,” he stressed.
Huttman said that many signed up five years ago and so much has changed in that time with the advent of remote working, adoption of new technology and the great resignation which saw many change jobs.
“This can help ensure that institutions continue to adhere to the principles and, with many people changing jobs in recent years, that senior staff at firms that have signed up remain committed to the code and its principles,” he said.
Nevertheless, the GFXS is contantly working to further strengthen FX Global Code adherence. To support market participants with less complex FX activities, in December 2022, GFXC members agreed to commission a Digital Proportionality Tool for facilitating FX Global Code adherence.
The GFXC Chair Andréa M. Maechler expressed her expectation that this mechanism will give new impetus to the promotion of the Code: “Since the update of the Code in July 2021, more than 80 market participants have newly signed up, in addition to the many others who have refreshed their earlier statement. I am convinced that the Digital Proportionality Tool will attract more new signatories to the Code, especially from the still underrepresented buy-side community.”
In addition, the GFXC is looking at the possibility of partnering with ESG rating agencies to enable firms that have signed up to the FX Global Code to demonstrate that they have fulfilled the ‘G’ element of their ESG commitments. This could potentially boost a buy-side firm’s overall ESG score. The committee is also prototyping a tool that would allow buy-side firms to identify the code’s principles that apply to them, lowering the barriers of entry.
Huttman welcomes the move and thinks that linking up with an ESG ratings agency would enable G (governance) to catch up with the progress made in E (environmental) and S (social).
“Lowering the barriers to signing up to the code, and linking up with an ESG rating agency to enable the buy-side to demonstrate strong governance would go a long way in boosting adoption. While ESG is top of mind for nearly every buy-side firm, much of the emphasis to date has been on the first two letters of the acronym – ‘E’ (environmental) and ‘S’ (social). This move, if made by the GFXC, would be a great way to enable ‘G’ (governance) to catch up.”
