The Bank for International Settlements (BIS) has established a new Foreign Exchange Working Group (FXWG) to create the first global code of conduct standards and principles in the foreign exchange (FX) market.

Objectives and Application1

  • To facilitate the establishment of a single global code of conduct standards and principles to be adopted across jurisdictions.
  • To maintain and enhance principles-based approaches to best practice.
  • To develop proposals to promote and incentivize adherence to the Code.

Critics have said the measures taken by regulators to date fail to go far enough in changing the structure of the forex market and the culture on trading floors that led to the scandals. Strengthening the code of standards and principles aims at preventing currency rigging and other market manipulations. The goal is to restore confidence in the $5 trillion a day market by ensuring increased adherence to the code.2

Currently, there are six codes of conduct for the FX market. The FXWG aims to settle the problem of conflicting codes for FX market practitioners, promising to draw the best from all existing codes and create a single document that will be universally applicable.3 The code is intended to go beyond the Global Preamble: Codes of Best Market Practice and Shared Global Principles central bankers drew up to attach to existing codes. The Code will include a set of clear examples and guidelines of behavior that are consistent with, and inconsistent with, the standards and principles adopted. It will deal with issues including how to deal with automatic stop loss orders, and the difference between when banks are making markets themselves and when they are acting as agents for clients.4

The resulting code of conduct document will attempt to be a comprehensive code offering guidance on all aspects of the FX market, including how to handle order flow and last look. It will apply to all practitioners in the market, including sell side and buy side, technology companies, platforms and non-bank financial institutions.5

Marshall Bailey, president of the ACI Financial Markets Association, believes his organization―the creator of one of the six codes to be consolidated by the BIS―can help, through its e-learning and certification (ELAC) portal. “Due to the availability of the ACI ELAC portal, we can help facilitate this important move through technology that allows both the agreement of which components to be in the code, as well as the important elements of providing a platform to demonstrate adherence,” he says.6

Enforcing the code still remains an issue, including how a global program can include sanctions that may be at odds with local legislation. Incentives and less severe penalties may be considered before recommending adherence through legal regimes and criminal sanctions.7

“FXWG, which operates under the auspices of the Markets Committee, is headed by Guy Debelle (Reserve Bank of Australia), Chairman of the Markets Committee. The group’s membership covers major financial centers in both advanced and emerging market economies. To support the FXWG, a Market Participants Group (MPG) is being established, drawing on participants from the sell side and buy side of the market as well as FX infrastructure providers. This group also has a wide and diverse geographical scope. The FXWG and the MPG will work closely with the FX Committees and reach out to jurisdictions beyond those represented on the Markets Committee. The MPG will be chaired by David Puth, Chief Executive Officer of CLS (Continuous Linked Settlement Bank International).”8

Key Client Takeaways9

  • The scope of adherence is expected to go beyond broker-dealer trading desks to include asset managers and trading platforms.
  • The new code of conduct will be written as guiding principles, not regulation. It will be up to individual governments to decide how to enforce the code.
    • Britain has already made rigging of currency and other market benchmarks a criminal offence, and the European Union is also bringing in tougher punishments for market manipulation.
  • The working group proposes that the new global code will be finalized in May of 2017.

References

  1. “Working group to strengthen code of conduct standards and principles in foreign exchange markets has commenced work,” Bank for International Settlements, Press release, July 24, 2015. Access at: http://www.bis.org/press/p150724.htm
  1. “Update 1 – New global forex code to take effect in May 2017,” Reuters, September 9, 2015. Access at: http://www.reuters.com/article/2015/09/09/markets-forex-regulations-idUKL5N11F1XK20150909#ZGRDQWJqMMbUPMma.97
  1. “Working group to strengthen code of conduct standards and principles in foreign exchange markets has commenced work,” Bank for International Settlements, Press release, July 24, 2015. Access at: http://www.bis.org/press/p150724.htm
  1. “BIS moves to end confusion over conflicting FX codes of conduct,” Euromoney, May 14, 2015. Access at: http://www.euromoney.com/Article/3453624/BIS-moves-to-end-confusion-over-conflicting-FX-codes-of-conduct.html
  1. Ibid
  1. Ibid
  1. “Central Bank Officials Set 2016 Interim Deadline for New FX Code,” Bloomberg Business, September 9, 2015. Access at: http://www.bloomberg.com/news/articles/2015-09-09/central-bank-officials-set-2016-interim-deadline-for-new-fx-code
  1. “Working group to strengthen code of conduct standards and principles in foreign exchange markets has commenced work,” Bank for International Settlements, Press release, July 24, 2015. Access at: http://www.bis.org/press/p150724.htm
  1. “Update 1 – New global forex code to take effect in May 2017,” Reuters, September 9, 2015. Access at: http://www.reuters.com/article/2015/09/09/markets-forex-regulations-idUKL5N11F1XK20150909#ZGRDQWJqMMbUPMma.97
  1. “Global Preamble: Codes of Best Market Practice and Shared Global Principles,” Foreign Exchange Committee, Federal Reserve Bank of New York, March 30, 2015. Access at: http://www.newyorkfed.org/FXC/2015/Global%20Preamble%20March30.pdf

Appendix

For further information on any of the regional codes of best market practice and specifics on the complete guidance provided by each individual code, please see the links below:10

ACI – The Financial Markets Association
ACI Model Code
http://www.aciforex.org/docs/misc/20120905_The_rewritten_Model_Code.pdf

Hong Kong Treasury Markets Association
Code of Conduct and Practice
http://www.tma.org.hk/PubFile/tmacode.pdf

London Foreign Exchange Joint Standing Committee
The Non-Investment Products Code
http://www.bankofengland.co.uk/markets/Documents/forex/fxjsc/nipscode1111.pdf

New York Foreign Exchange Committee
Guidelines for Foreign Exchange Trading Activities
http://www.ny.frb.org/FXC/2010/tradingguidelinesNov2010.pdf

Management of Operational Risk in Foreign Exchange
http://www.ny.frb.org/fxc/2010/operationsguidelinesNov2010.pdf

Singapore Foreign Exchange Market Committee
The Singapore Guide to Conduct and Market Practices for Treasury Activities
http://www.sfemc.org/pdf/SingaporeBlueBook_April2012.pdf

Tokyo Foreign Exchange Market Committee
Code of Conduct
http://www.fxcomtky.com/coc/code_of_conduct_e.pdf

Newsletter Author: Patricia Marsh | Mairi Bryan | Michael Vikman

Newsletter Contact Person: Craig Unterseher

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