On 25 May 2017, the FX Global Code of Conduct was launched to promote the integrity and effective functioning of the wholesale foreign exchange (FX) market.
One year on, nearly 200 firms, ranging from central banks to algorithmic trading providers and ECNs, have signed statements of commitment to the Code.
Despite the deadline for signing ups passing on 25 May 2018, there are still institutions that are yet to sign up the Code and thus, a long way to go before it achieves widespread adoption.
Spot FX platform, ParFX, was one of the first to sign up to the Global FX Code. The exchange’s principles of transparency, fairness and equality align with those of the Code’s, making signing up a no brainer. Talking to Markets Media, COO Roger Rutherford stated that the Code was the best method to correct the industry’s reputation, “the alternative could have been more regulation which takes time and introduces further costs to the industry. So whilst the market is adjusting to MiFID II, a code of conduct is a better way to bring ethics back into the FX marketplace.”
Moving forward, Rutherford believes institutions shouldn’t immediately be penalised for having not signed up. “For now, an institution could probably make a good case for why they haven’t done so yet because they are waiting for the final details on last look, anonymous trading and cover-and-deal to be decided by the working groups.” However, Rutherford added we can expect to see central banks refusing to do businesses with those who haven’t signed up to the code.
The ACI FMA is a trade association which represents over 9,000 financial markets professionals. The ACI was the first to set an industry standard in the 1970s with its ‘Model Code’, which was retired upon the launch of the FX Global Code last year. As a strong believer in setting an ethical standard, the ACI has supported the launch of the Code with its ELAC portal, an online platform which provides FX professionals with continuous training and certification. It also offers an online version of the FX Global Code Certificate which formally tests an individual’s understanding of the Code’s 55 principles.
Looking beyond the first year of the code, Paul Chappell director of education at the ACI Financial Markets Association, believes the industry has more room for improvement in relation to adoption of the code. “There are elements of the code – particularly around pre-hedging as well as last look – that demand a significant cultural shift and some large market participants have a long way to go in this respect,” he says.
Pragma is one of the leading algorithmic trading technology providers in the FX and equities market. The company recently made headlines with its statement of commitment to the Global FX Code. Pragma believes algorithmic technology lends itself to aiding traders with their transparency requirements, as each transaction is databased and therefore easy to analyse.
A less successful part of the Code is the rate at which buy-side institutions have signed up to the code. “If you look at the public registers, there are certainly fewer buy-side participants that have signed up to the code. I think there is a sense that the code was pointed towards the sell side, because that is where the bad behavior in the FX market was uncovered, therefore the buy side feels less urgency to sign up,” according to Curtis Pfeiffer, Chief Business Officer at Pragma Securities.
Looking forward, Pfeiffer believes that corporate treasurers will have a key role in the success of the Code. “For a corporate treasurer to now commit to the Code sends a public message to its service providers – banks, brokers and vendors – of the behaviour it expects from them. Doing so opens and encourages new ways of doing business, and advocates for greater use of algorithmic trading and TCA [transaction cost analysis].”
What to look for next year
It is clear that the Code is the first step in a long journey the FX market is taking to improve its reputation. To reach full effectiveness there needs to be unanimous adoption across the industry. There will need to be a further push to get market participants such as buy-side and corporate treasurers to commit to the Code. On the other hand, there are aspects of the Code such as last look, anonymous trading and cover-and-deal, that will need to be developed before some institutions commit.
It will be interesting to see how the FX Global Code evolves after its deadline and if, following the outcome of the three working groups, it continues to see the same critical mass it has experienced in the first half of 2018