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Ethical FX via the Global Code

Traders Magazine Online News, June 22, 2017

Ivy Schmerken

Foreign exchange participants are getting a crash course in ethical behavior.

With the release of the FX Global Code for the wholesale foreign exchange market last month, the FX industry is counting on a single set of guidelines to prevent bad behavior in currency trading.

Launched by the Bank International Settlements on May 25 in London, the final release caps a two-year effort by central bankers in the FX Working Group (FXWG) and private sector Market Participants Group (MPG) from 16 jurisdictions around the globe.

Ivy Schmerken

The standards are seen as a reaction to several FX rate-rigging scandals in the London Interbank Offered Rate, which began in 2012 and resulted in multi-billion dollar bank fines. Around the same time, pension funds also began to file lawsuits against their custodians over the timing and price of the FX executions.

“All of us recognize the need to restore the public’s faith in the foreign exchange market. We share the view that the Global Code plays an important role in assisting that process and in helping improve market functioning,” said Guy Debelle, Reserve Bank of Australia Deputy Governor, who chaired the FXWG, in opening remarks.

While adherence to the 75-page document is voluntary, it seeks to establish a set of best practices that applies to wholesale market participants across all regions.

Dealers, asset managers and hedge funds, corporate treasury departments, benchmark execution providers, brokers, e-trading platforms, and affirmation and settlement providers fall within the scope of the global code.

The final document contains 55 principles covering six categories:

  • Ethics
  • Governance
  • Information sharing
  • Risk management
  • Compliance
  • Confirmation and settlement

It also covers complex topics, such as electronic trading, algorithmic trading and prime brokerage.

Providers of algorithmic trading or aggregation services to clients are told to provide adequate disclosure regarding how they operate, including information on fees, whether they execute as principal, and information on their routing preferences.

Last Look and Pre-Hedging

The code weighs in on the practice of “last look,” which has been the subject of much debate throughout the industry. As stated in the code, last look allows a market participant receiving a trade request to have a final opportunity to accept or reject the request against its quoted price during a specific time, known as the last look window.

What’s Next for the FX Global Code?

  • There will be a comment period on pre-hedging during the last look window, which is open until Sept. 20.
  • Major market participants will be signing the code over the next three to six months.
  • Eventually, there will be a registry or repository where participants can go to see who has signed on.
  • As a living document the code will have a light review on an annual basis, to understand how people are putting the code into practice and to review any market changes.
  • A more thorough review will take place every three years.

  

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