Guy Debelle: why the FX Global Code matters

I hope this article serves as a call to action for attendees at the International Monetary Fund and World Bank meetings, both public and private, to read the FX Global Code (FXGC) and seriously consider signing up to it through a statement of commitment.

The FXGC sets out principles of good practice in the foreign exchange (FX) market to provide a common set of guidance. It aims to help restore confidence and promote the effective functioning of the wholesale FX market. A well-functioning FX market is very much in the interest of all market participants.

A question of trust

Why was the work to develop the global code necessary? The FX industry has been suffering from a lack of trust. This lack of trust has been evident both between participants in the market and, at least as importantly, between the wider public and the market. The market needed to improve its reputation, and allow everyone to have much greater confidence that the market is functioning appropriately.

The FXGC was published in May 2017, representing the culmination of two years’ work. It was very much a public sector-private sector partnership. I chaired a group of central bank representatives from the 16 largest FX markets, including both developed and emerging markets, which had been commissioned to develop the code by the governors of the Bank for International Settlements (BIS). This central bank group worked together with a group of market participants, chaired by David Puth, chief executive officer of CLS, the world's largest multi-currency cash settlement system.

Mr Puth’s group contained representatives from the buy side, including corporates and asset managers, and the sell side, along with trading platforms, electronic communication networks and non-bank participants, drawing from the various FX committees around the world. All parts of the market were involved in the drafting of the code to make sure all perspectives were heard and appropriately reflected.

An over-arching code

The FXGC supplants the existing codes that have been present in the FX market. Now there is one single code, which covers all of the wholesale FX industry. This is not a code for just the sell side but also the buy side, non-bank participants and the platforms. It reaches around the globe and across the whole industry.

The FXGC’s relevance will depend on the nature of the engagement with the FX market. What this means in practice is that the steps different market participants take to align their activities with the principles of the code will differ, reflecting the size, complexity, type and extent of their engagement with the FX market.

The code covers six main areas: ethics; governance; information sharing; execution (including e-trading and platforms); risk management and compliance; and confirmation and settlement. It comprises 55 principles, which are written in plain language and can be easily read and understood by market participants. These principles are supplemented by a suite of examples to illustrate their practical application.

Feedback opportunities

Market participants had a number of opportunities to comment on the FXGC, in addition to the direct input of the market participants group. Drafts of the full text of the code were distributed for review, principally through the various FX committees, but also through other industry associations to ensure all perspectives were appropriately reflected in the code. More than 10,000 comments were received through this process. The FXGC reflects the group’s collective judgement as to what constitutes good practice in the market.

One of the central aims in drafting the FXGC is for it to be principles based, rather than rules based. There are several reasons why this is so, but an important one is that the more prescriptive the code is, the easier it is to get around. Rules are easier to arbitrate than principles. And the more prescriptive and the more precise the code, the less people will think about what they are doing.

The code is not a procedures manual. Rather, it articulates principles that need to be taken into account when individual firms craft their own procedures. The aim in setting out these principles is to provide market participants with the framework in which to think about how they conduct themselves in the market. The FXGC will not provide the answers to all market participants’ questions, but it should help them ask the right questions.

Blueprint for success

Alongside drafting the FXGC, the BIS FX working group devoted considerable time and effort to thinking about how to ensure widespread adoption of the code by market participants. Clearly, this has been an issue with the various existing codes that had been in place in a number of markets. Evidently they were ignored on occasion in the past, wilfully or otherwise. The FXGC does not impose legal or regulatory obligations on market participants, nor does it supplant existing regulatory standards or expectations.

We have developed a blueprint for adherence, which was published alongside the code and sets out the key elements we think will be required for the FXGC to be successful – and the steps that have been and will be taken to ensure this is the case.

One vital aspect is market-based adherence mechanisms. An important element of discipline should come from the market itself. The adherence to a voluntary code will only come about if firms judge it to be in their interest and take the practical steps to ensure the FXGC is embedded in their practices. Such practical steps would include training their staff and putting in appropriate policies and procedures.

Annex 3 of the FXGC provides a draft statement of commitment for firms to use in publicly demonstrating their adherence to the code. One reason for a public demonstration is that firms are more likely to adhere to the code if they believe their peers are doing so too. Therefore, an important source of pressure to adhere should come from other market participants. To provide visibility around this, there are a number of public registries where market participants can display their statements of commitment, such as the recently launched CLS public register.

More broadly, market participants have a vital interest – and role – in promoting and upholding good practices in the market as a whole. This can be partly achieved through leading by example, but can also be supported by having similar expectations of counterparties and other market participants and helping to raise awareness of the FXGC in their market interactions. To that end, the BIS central banks have announced that they will follow the FXGC, and that they expect that their counterparties will do so too.

Another aspect of market-based adherence comes through the FX committees around the world. The FX committees have all endorsed the code. Adherence to the FXGC is likely to become a requirement of FX committee membership. That will ensure the code is embedded at the core of the FX market, given the extent of coverage of the FX committees. But it is also important that it extends beyond that, and that there is, at the very least, an awareness of it across all market participants.

There will be a period of time for market participants to adjust their practices, where necessary, to be in line with the principles in the FXGC. This period is not likely to extend beyond mid-2018.

Restoring public faith

Finally, it is vital that the FXGC remains up to date and evolves as the market changes. The code will be collectively owned, maintained and updated by the Global Foreign Exchange Committee (GFXC), which will continue the public-private partnership that has supported the development of the code. The GFXC will regularly assess whether new information or market developments warrant updates or additions being made to the code.

The FXGC has reflected a very constructive and co-operative effort between the central banks and market participants. We share the view that the FXGC plays an important role in assisting the process of restoring the public’s faith in the FX market and also in helping improve market functioning and confidence in the market.

For the code to be successful, it needs to be widely adopted and embedded in all parts of the FX market. This is true both in terms of the various participants in the market, but also importantly geographically, extending beyond the 16 FX committees involved in drafting the code, to other FX markets.

Guy Debelle is deputy governor of the Reserve Bank of Australia.