Is the FX Global Code working?

In recent years, the FX market has been experiencing a period of turbulence. A series of scandals, following a string of misconduct issues, led to some market participants reassessing their existing relationships and trading processes.

To tackle the deficit of trust, the global foreign exchange (FX) market came together with policymakers to create the Global Foreign Exchange Committee (GFXC). This public-private partnership is tasked with overseeing and developing the FX Global Code, a set of guidelines which aim to improve transparency and ethics across the FX industry.

The FX Global Code debuted in May 2017. A little over a year later, the GFXC has carried out a thorough assessment of the progress so far and identified its priorities for the year ahead.

One of the main takeaways from the report was the sizeable levels of awareness and commitment theFX Global Code achieved in its first year. In a survey conducted in September 2017, 250 market participants said they would eventually sign the Statement of Commitment (SoC) to the Code. By May 201­­8, more than 326 had done so – an increase of 30%.

Along with the number of SoCs, 12 different public registers have been created to monitor and track sign-ups. Such numbers are indicative of how much the FX Global Code has embedded itself across the industry.

The Code has also achieved great penetration across the globe. It ranks high on the agenda of FX trade associations and at industry events around the world. Furthermore, in its first year, Mexico, South Africa, Scandinavia and Switzerland have either established FX committees to support the Code or are in the process of creating one. These local committees are critical to embedding a Code that is truly global and standardised.

Another success of the first year of the FX Global Code is the creation of training programs. These are created to aid FX traders that don’t have a process within their institution outlining how to follow the Code. One such program is the ACI FMA’s increasingly popular ELAC Portal, which provides step-by-step professional development for those looking to prove their adherence to the Code via tailored questions and real-life scenarios. This is a healthy sign that there is genuine demand in the FX community to follow the principles of the Code, and that it isn’t simply being forced upon industry professionals by the GFXC.

Of course, signing a SoC does not mean an institution has completely changed their practices to align with the Code. Rather, it indicates that they have reviewed their processes and intend to align with the principles laid out in the Code.

Looking the public registers, it appears the bulk of those that have adopted the Code’s principles are made up of sell-side institutions, central banks and FX market infrastructure providers. The buy-side and non-bank institutions are lagging behind, with only 11 of the top 25 asset managers and two corporates signing up to the Code.

According to the GFXC, the complexities of buy-side institutions and the lack of incentives for signing up are the reasons for the slow take up. The buy-side is much more diverse than the sell-side, and therefore has varying levels of resources.

At the same time, it is important to recognise that the Code has not been met with universal approval from all sections of the market. Issues such as last look have been contentious for some sections of the FX market.

Overall, it appears market participants believe the Code is robust in its current state, although evolution in line with market changes is inevitable. In this respect, a new working group has been set up to focus on integrating the Code into the ‘fabric of the FX market.’

To answer the question posed in the title of this blog, the Code is working and has achieved a lot of things it set out to do, securing significant awareness and commitment throughout the industry. However, there is a lot more that needs done – particularly around engaging the buy-side. It remains to be seen how the industry actually implements the principles laid out in the Code over the next year and the consequences, or lack thereof, for those that do not.