Photographer: Simon Dawson/Bloomberg

Fixing FX: The Currency Trader's New Guide to Ethical Behavior

  • 75-page code of conduct aims to restore trust after scandal
  • Principles cover ‘last look,’ pre-hedging, info sharing

The $5.1-trillion-a-day currency market is getting a new playbook as foreign-exchange traders try to change their image from naughty to nice.

In a worldwide cleanup effort, more than 40 industry participants, steered by central bankers, have hammered out the FX Global Code -- 75 pages of voluntary standards aimed at rooting out misconduct in the world’s biggest financial market.

The document, released Thursday by the major central banks, offers such advice as: Protect confidential information, don’t mislead your counterparties and be fair and transparent. The guidelines culminate a two-year effort to bolster standards and discourage bad behavior after a rate-rigging scandal led to about $10 billion in fines for banks and damaged trust in the industry.

“This is effectively their last chance to try and get things right,” Guy Debelle, deputy governor of the Reserve Bank of Australia, said in an interview. He led the group of central bankers working on the standards, which generated more than 10,000 comments when they were being drafted. “The odd billion-dollar fine will focus the mind.”

The currency market received a reminder of the obstacles as recently as Wednesday, with an announcement that BNP Paribas SA was fined $350 million for its involvement in the foreign-exchange manipulation scandal.

Global Promoters

A new committee of officials and market participants will work to promote the code worldwide and keep it up to date. Chris Salmon, executive director for markets at the Bank of England, will chair the group for two years. David Puth, chief executive officer of CLS Group Holdings AG, will serve as vice chair for a year. He led the group of industry participants that crafted the code.

One of the new committee’s first tasks will be to hold a public consultation on the controversial practice of “last look,” which allows dealers to back out of losing trades. The feedback period will run into September, Puth said.

The broader code covers ethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement procedures. It also includes a series of scenarios to illustrate best practices.

For Mayra Rodriguez Valladares, a former foreign-exchange analyst for the Federal Reserve Bank of New York, tougher rules and enforcement are the answer, rather than a set of voluntary codes.

“I’m embarrassed that we have to have a code in which people say they’re going to avoid conflicts of interest and abide by ethical practices,” said Rodriguez Valladares, who trains banks and financial regulators as managing principal of MRV Associates in New York. “When you have things like codes and principles, it’s an even longer path to get it into industry practice.”

Counterparty Pressure

Even so, the world’s major central banks pledged to adopt the code and said they expect foreign-exchange counterparties to follow suit.

“There will be peer pressure,” Debelle said. “If I’m going to trade with you, you’re going to have to sign that statement of commitment, and I’ll hold you to account for that standard of behavior. There’s something to that market discipline.”

While companies and individuals can adopt the standards on a voluntary basis, they aren’t legally binding. Firms that commit to the code will probably be added to public lists, although details about who would maintain and publish the registries are still being finalized.

“Do I think it raises the odds that unethical behavior will be identified and shut down quickly? Of course,” Puth said. “Do I think that people will understand the difference between right and wrong in a better way than they did before? Absolutely.”

Some recommendations from the FX Global Code include:

  • Market participants should strive for the highest ethical standards.
  • Pay and promotions should promote practices that are consistent with ethical and professional conduct.
  • Market participants should only pre-hedge client orders when acting as a principal, and should do so in a fair and transparent manner.
  • Markups applied to client transactions should be fair and reasonable.
  • Access to confidential information should be limited, and private information should not be disclosed to external parties.
  • Market participants using last look should be transparent about its use and give appropriate disclosures to clients.
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