The world’s biggest financial market has a new set of do’s and don’ts. The FX Global Code, published in May, aims to stamp out misconduct in foreign exchange -- the trade of national currencies -- following a rigging scandal that triggered about $10 billion in fines for banks. More than 40 industry veterans spent two years drafting the code, with guidance from central bankers. This is the “last chance to try and get things right” in the $5.1 trillion-a-day market, said Guy Debelle, deputy governor of the Reserve Bank of Australia, who led the group of policy makers working on the standards.
1. How will the code be enforced?
It won’t. The code is voluntary and not legally binding -- in its own words, "intended to serve as a supplement to any and all local laws, rules and regulations by identifying global good practices and processes." The hope is that peer pressure will lead to an industrywide rise in standards. “For the code to be effective, and for it to achieve what we want it to achieve, it will need to be accepted and endorsed across the full spectrum of market participants,” Debelle said in a speech in March.
2. What’s in the code?
Most of its 75 pages are dedicated to laying out 55 "principles" covering ethics, governance, execution, information sharing, risk management and compliance, as well as confirmation and settlement procedures. An annex of "illustrative examples" spells out hypothetical breaches of protocol -- manipulating the market, sharing confidential information, misleading counterparties.
3. Who’s on board?
CLS Group Holdings AG, which settles more than $1 trillion of currency transactions a day, has already adopted the code -- no surprise, since its chief executive officer, David Puth, spearheaded efforts to create the standards. Representatives from banks, asset managers, trading venues and corporations have said that their companies intend to adhere to the code. That’s a first step, which will later be followed with a declaration that the principles have been incorporated into their business practices. That process could take about six months to a year. The world’s major central banks pledged to adopt the code as well.
4. Is everybody happy with the code?
No. Skeptics argue the standards aren’t a strong-enough deterrent without legal or regulatory obligations. They’re “incredibly basic,” according to Mayra Rodriguez Valladares, a former foreign-exchange analyst for the Federal Reserve Bank of New York, who says tougher rules and enforcement are the answer. Also, the code doesn’t settle the debate around "last look," a controversial practice that allows dealers to back out of losing trades.
5. Does the code even address ‘last look’?
Yes. The code’s principle No. 17 reads, "Market participants employing last look should be transparent regarding its use and provide appropriate disclosures to clients." It also says trading that uses information from clients’ trade requests, including hedging during the so-called last look window, “is likely inconsistent with good market practice." A newly formed Global Foreign Exchange Committee comprised of government officials and market participants is seeking feedback on how the code addresses "last look." It plans to share a summary of responses publicly before its next meeting on Nov. 14.
6. Does the code address the rigging scandal?
Yes, in that it gives clearer guidance on some practices, now frowned upon, that some claimed were commonplace before the rate-rigging allegations surfaced. The code is the linchpin of a global cleanup effort to rebuild trust after the FX manipulation scandal. In one of the more notorious instances, a group of traders at different banks formed a chatroom they dubbed The Cartel where they’d share information in an effort to move rates in their favor. Global banks have paid billions to settle related criminal, regulatory and investor cases.
7. What happens next?
The Global FX Committee will 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. Central bankers have said that failure to act on the recommendations could trigger further regulation. Companies that commit to the principles will probably be added to public lists, although it’s not clear which bodies will monitor the declarations.
The Reference Shelf
- The FX Global Code outlines best practices for the scandal-plagued industry.
- A speech by Guy Debelle, Deputy Governor of the Reserve Bank of Australia, introducing the standards.
- A Bloomberg News article about Citigroup Inc. and others training staff on market conduct and the new principles.