BIS FX Code of Conduct Offers Reasons For Optimism

Chris Salmon, Executive Director of Markets at The Bank of England, highlights the reasons to be optimistic about the new FX Code of Conduct, which will launch in London next May.

The BIS Code of Conduct is arguably one of the largest, most ambitious and comprehensive efforts to introduce globally-accepted standards and guidelines to govern conduct and behaviour in the foreign exchange market.

Initiated in 2015 by the Bank for International Settlements (BIS), it is designed to establish a single, global code of conduct for the wholesale FX market and promote greater adherence.

The process is well advanced and remains on track to launch in May 2017, according to Chris Salmon, Executive Director, Markets, Bank of England. As a senior official at the UK’s Central Bank, he is actively involved in the development of the Code. His speech at the ACI Financial Markets Association in London provided great insight into why global regulators and market participants remain positive about the final Code.

Chris Salmon highlighted four reasons for optimism. The first is the substance of the Code itself. It will directly address the complexity of the FX market and provide guidance where it is necessary, he says.

Secondly, he reiterated the importance of keeping the Code up to date. Its completion in just two years means it should be relevant for today’s market when published. Importantly, he adds, the new Code will not be allowed to stagnate; the BIS is committed to developing an appropriate review mechanism so that the Code stays up to date and evolves as the market evolves.

Third, the process for developing the Code is inclusive and unprecedented in many ways. The Code will apply to the buy-side, sell-side, non-bank participants, trading platforms and other market infrastructure providers. Therefore, there is engagement from all types of key market participants, including 40 members of the Market Participants Group (MPG), chaired by CLS CEO David Puth, and regional FX Committees. This ensures the final Code will get buy-in from a wide range of diverse market participants.

Lastly, he highlighted how the Code is one of a suite of important initiatives that have launched in recent years to improve conduct in FICC markets. Initiatives such as the FICC Market Standards Board, created as a direct consequence of the Fair and Effective Markets Review, and UK Senior Managers and Certification Regime, soon to be extended beyond banks to all FCA authorised firms, will aim to raise standards of market conduct by strengthening the accountabilities of senior management. These initiatives, combined with a greater focus on conduct, create a supportive environment for the objectives of the Code.

While this will be received well by the FX market, he also cautions that the Code will only rebuild trust if it is actively used by market participants and drives a market-wide shift in culture and attitudes – one that embeds behavioural norms that are consistent with both the letter and spirit of the Code.

This type of cultural shift is not something that can be mandated; ultimately, that change must come from the industry. Firms that assimilate the Code fully are likely to benefit, over time, from greater trust in the marketplace, a stronger reputation, and a higher long term franchise value.

Individually, firms and senior personnel should start considering the steps they will take to support the Code. In a world where competition for market share remains fierce, winning the trust of clients matters financially.

To this end, Mr Salmon recommends three elements be put in place to realise the benefits of the Code.

First, the Code needs to be embedded in firms’ practices, training and education; second, firms should have the right policies and procedures in place to ensure that they are able to monitor how successfully they have embedded the Code; and third, firms should be able to demonstrate publicly that their behaviour and practices in the FX market are in line with the Code’s principles.

The first phase of the Code was well received by the FX industry, and there is no doubt that the widespread use of a common public attestation could be a powerful tool. It would provide a strong signal of a firm’s commitment to following good practices and rules that are applied internationally across borders.

The launch of the second phase will be an important milestone in the industry’s efforts to reaffirm trust in the FX market. It is no secret that all has not been well in FX or FICC markets more generally; the completion of the Code of Conduct, and its application amongst individual firms, will send the right signal to clients, regulators and employees.

The full speech by Chris Salmon can be found here.

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