The FX Global Code published last month is a non-binding codification of global "good practice" for FX market participants. It replaces the existing guidance. The genesis of the Code is the significant damage caused to the reputation of FX markets by rigging scandals (and eye-watering settlements). The industry has therefore taken pre-emptive action to create its own non-binding standards, no doubt concerned by the prospect of regulators imposing even more rigorous standards on them if they do not act. In the UK, both the FCA and PRA have welcomed the move. This article looks at the scope of the Code and what it might mean for UK-based FX market participants.
The Code applies to "Market Participants" meaning (in summary) those who are active in the FX market as part of their business. Whilst the Code is primarily targeted at banks, this definition is broad, covering diverse players including central banks, asset managers and retail FX brokers. It is not intended to cover private individuals trading their own funds.
In terms of the substantive contents of the Code, there are some 55 principles spread over six areas of focus: (i) Ethics; (ii) Governance; (iii) Execution; (iv) Information Sharing; (v) Risk Management and Compliance; and (vi) Confirmation and Settlement.
- For FCA-regulated FX market participants, especially those already subject to the Senior Management and Certification Regime (SMCR), or with an eye on the wider SMCR roll-out in 2018, the requirements of ethics and governance should not be too controversial. The ethical requirements focus around integrity, good practice and avoiding conflicts of interest. The governance requirements seek to bring about these ethical standards by clear allocation of responsibility, oversight, controls (including appropriate remuneration structures) and management information.
- The requirements of execution and information sharing focus on transparency, both in terms of the services being provided and in terms of the cleanliness of the FX market. This includes requirements as diverse as ensuring a "fair and reasonable" spread (or charge) and pre-hedging. One aspect that has caused some controversy is that the Code does not condemn so-called "last look". This allows liquidity providers a window to receive an order but to decline to trade. However, "last look" is unpopular in that it may cause "slippage" for clients, in that the rejected order has to be filled at a different - potentially worse - level. Even more significantly, in the wrong hands, "last look" gives Market Participants valuable knowledge about the nature and size of prospective client orders. Last year, the US Department of Justice imposed a $150m fine on Barclays for using the "last look" to decline orders that might be less profitable for the bank – clients were told that their orders were not filled due to a technical issue. The Code calls for Market Participants to be transparent as to when they will use the "last look" and for controls to be implemented and monitored. It remains to be seen whether this will be enough to prevent abuse and the need for tighter regulation.
- In relation to risk management and compliance, the Code calls for processes to monitor and mitigate both external risk (such as counterparty risk, anti-money laundering controls and settlement fails) and internal risk (human error and independent mark-to-market processes). It also calls for processes that ensure timely and clear settlement and confirmations.
Whilst not legally binding, in the UK, the FCA has already said that the Code will be useful in terms of helping firms communicate expectations to their people in the wider context of SMCR. As is well known, the FCA's Code of Conduct for individuals and senior managers includes requirements to adhere to market standards. It is therefore possible that in future the Global FX Code will form the backdrop to firms' disciplinary processes and potentially FCA enforcement action. Civil litigants will also no doubt view it as a good benchmark of how firms ought to have conducted themselves. The Code is therefore likely to be far more than mere window-dressing.