The new Model Code of Conduct in the Foreign Exchange Markets will be released in May. There was an important pre-release webinar last week. I recently had the opportunity to listen to a webinar hosted by FX Week & ACI The Financial Markets Association (‘ACI FMA’)on the upcoming release of the Global Code of Conduct in Foreign Exchange Markets due out in late May this year. Because of the importance of the release of the Global Code I thought I’d share with you notes taken by my friend Eddie Tofpik of the excellent institutional broker, ADM Investor Services International. The Code will have important implications for the furure of an independant OTC FX and Money Markets. Eddie reported:
“Eva Szalay – Editor, FX Week hosted the session with David Puth – Leader of the Market Participants Group (MPG) & CEO of CLS, John P. Drohan III – President ACI Americas, James Sinclair – Co-Chair of the examples workstream on MPG & Co-Founder of MarketFactory, Paul Chappell – ACI FMA UK Executve Committee, ACI FXC, Chair ACI Working Group in production & adherence to the ACI Model Code and Stephane Malrait – Chair of ACI FX Committee & Global Head of Markets eCommerce at ING.
David started by outlining that the BIS Markets Group and the MPG had been working on this for two years and the last draft had been submitted in early March. The BIS Governors Group had ‘…largely been completed…’ on the code and it was ready for the 25th of May.
Eva asked what ratio of input was the private sector compared to the Central Banks (‘CBs’)?
David said it was a collaborative effort. The BIS & MPG divided the Code into sectors, some private sector led and others the CBs focussed on, it was a ‘…true example of public private partnership…’ and ‘…a large group of people working together for a common consensus…’.
Eva asked if some earlier fears were unfounded?
David replied it was an ‘…exemplary process…’ with them spending time and energy listening to all. Public & private sectors recognised on ‘…how high the stakes were to get it right.’. It was a highly motivating force compared to a less progressive regulatory force. It was a supplement to regulation and to make the market work more efficiently, for example – information sharing and MPG inability to convey information in an efficient way. The Group focussed on information sharing. He added, speaking to James, the code is not regulation. It is a principles based rulebook…how to create examples.
James responded that it is a ‘…principles based code, not a rulebook’. How little was actually new compared to previous codes. It was writing down what is good behaviour and he paid complement to colleagues at the Swedish Riksbank in work they had done. One group took a view of where the examples were most likely. There were 350 different examples they could give and the challenge was to make an example that has the right detail…not too little and not too much. They whittled it down to 60 examples of ‘…positive and negative examples…’.
Eva asked if they could outline was for what was good behaviour or positive & negative…not always negative? She added that the ACI FMA has a Model Code, what impact did the ACI FMA have on this work?
John responded that the ACI FMA had input before the BIS started the work on the Global Code and the other CBs appreciated it. It was important as this consolidates various national codes. The ACI FMA was the only organisation representing individual traders and this was important and appreciated.
Stephane said the ACI FMA added value with membership from various international committees.
Paul added that ‘…we (the ACI FMA)…’ had many of the same challenges in bringing together people from various different aspects, he then gave the story of the old BOE Grey Book which was issued in the past for new young FX traders to memorise when they started in the UK. The Global Code was for everyone.
Eva asked about adherence – what role ACI FMA plays? The practical challenges? The operational challenges?
David replied that he was not the best to speak on this but supports colleagues of ACI FMA on the basis of other market codes. He’s indebted to the ACI FMA and adherence he would ‘…defer to others…’. Training will be in place. It will be up to each institution so all can follow the Code.
Paul pointed out that first it is to register all who keep the Code. ‘Adherence comes from education!’. ACI FMA education will go towards the Global Code Certificate and online CPD.
Eva then opened it out to audience Q&As
What is most important for banks electronically quoting clients and what happens locally with authorities?
John answered – attestation. Management can do spot checks and local authorities. There is verification of attestation. Regulators are moving towards ‘trade cost analysis’ (‘TCA’) with this starting in the Hedge Fund industry but moving into all aspects of the markets. There was also a move in the EU to a ‘…consolidated tape…’. The analysis of trade cost is increasing. Stephane said that on a national level, the ACI FMA was represented in more than 60 countries. The upcoming Global Congress in Dublin will push certification.
Who will maintain the register and who will sign?
John said it would be a public register – how is yet to be determined. It will be jurisdiction by jurisdiction and registration can be at local level or at head office. James added that various organisations involved in FX had given ‘statements of intent’ in supporting and using the Global Code. ‘…if there had been universal agreement then there wouldn’t have been the need for a Code…’. Each may be different and he did not expect all to be complaint on Day 1. It will take a little bit of time.
Would there be an announcement of who would be responsible for the public register?
James said – yes, it would vary from area to area.
Do vendors need to endorse the Code or is it just users?
James said that some of it will apply, aggregation for example. However, the ‘…principles are kin…’. Stephane already saw trading platforms based on the Global Code. All adhere to eh same principle. James added that there were ‘…no surprises to anybody…’.
Principles on ‘Last Look’ and prehedge a contradiction?
David deferred his answer till the release of the Code. Committees have worked on the principle relating to prehedging have a period of consultation. The principle on Last Look was not subject to consultation. The review process will continue in the years to come and we’ll see an ‘…ongoing review process…’. To sum up, the principle on Last Look is very much in place and the principle on prehedging is subject to consultation. Big reviews will happen every three years .
Will the ACI FMA keep updating its Code?
Paul said the reality was that the ACI FMA will adopt the Global Code and will have that alongside other market codes (money markets, commodities, etc…) ‘…plus practical guidance…’.
How will the Code link to the FCA & other regulators?
Stephane said the FCA sees MiFID II and other areas touching on this. ‘There should not be any discrepancy..’ between the two. It was MiFID II compliant.
When banks outsource execution matrices, is there individual accountability or are they abdicating their responsibilities?
James highlighted that this was important. Reference rates were a positive step and an independent review of what was going on…but it was not part of this at the moment. John stressed the increased level of responsibility banks & users have to the market. Outsourcing execution is a mistake, the responsibility remains to how you buy and the outsourcing company ALSO follows. David asked in the buy side would abide and James said yes! The code looks at the situation today and enhances good behaviour. Paul ‘…echoed that…’. The Code is a set of principles and can be exceeded. John mentioned that today Greenwich Associates released a survey that 48% of participants used TCA. The push to a centralised tape is a lot easier with technology catching up.
Do we have to prepare new written paperwork?
Stephane said banks are already using such paperwork, so the ‘…Global Code will promote more transparency…’. There will be more buy/sell side discussions.
Will it be FXPBs job to filter out those who won’t sign up?
John said there were certain limitations to operational monitoring by FXPBs but he expected client who misbehave to be addressed.
Eva asked for final comments from the panel!
Paul said it was recognition that all have to be involved and expected it. He also expected more robustness in adherence.
John said his points were individual accountability with a move to verification being more universal and all being more informed.
Stephane expected more education online and via app by the end of the year, ‘…intent first and then compliance…’.
James ‘…expected adherence to be swift…’. With the amount of time they have all dedicated to this, he expected it to be swift…but it will need updating.
John added that he expected adoption to be ‘…high…’and that it made ‘…simple common sense…’. There will always someone trying to go around it but expected a lack of tolerance for this from the end of May. Those behind will get forwarded.
Overall, I found it interesting but as expected…we’ll have to wait till May to actually see the Global Code (…and the 60 odd examples…).
As I have mentioned here & in my previous reviews, these are personal views & recollections from the event which I am happy to share with you. If you have any questions or queries, then please feel free to contact me.
All the best
Head of Foreign Exchange
Telephone +44 20 7716 8201 24 Hour Telephone number +44 20 7390 2952 @EddieTofpik