Is the Global Code Working? (Part Two)

Heralded as a means to enact a new age of transparency in the Foreign Exchange (FX) markets, the FX Global Code (the Code) was rolled out nearly two years ago in response to yet another embarrassing and costly scandal that roiled our industry. The Code establishes a global standard of behavior amongst all market participants, one that supplements legal and regulatory rules governing the FX market. Is it working? Twenty months later it is important to examine whether it is.

Let us remind ourselves what we first set out to accomplish with the Global Code. The crux of the Code provides a uniform set of guidelines that participating members agree to voluntarily follow by pledging their support in a Statement of Commitment. Three main objectives of the Code follow:

1. To promote collaboration and communication among the local foreign exchange committees (FXCs) and non-GFXC jurisdictions with significant FX markets;

2. To exchange views on trends and developments in global FX markets, including on the structure and functioning of those markets, drawing on information gathered at the various FXCs; and

3. To promote, maintain and update on a regular basis the FX Global Code and to consider good practices regarding effective mechanisms to support adherence.

The Code, with 55 principles, addresses a variety of major issues including ethics, governance, execution, information sharing, risk management, compliance, confirmation and settlement. It also tackles complex topics such as electronic trading, algorithmic trading and prime brokerage.

Clear indicators that the Code is on the right path is by an evaluation of its intended impact. The FX market is a massive one to regulate. Nonetheless, nearly all of the central banks have voluntarily signed the Statement of Commitment pledging their support to abide by the Code.

Both buy side and sell side firms of a certain size were meant to sign, and it is obvious when a firm has signed the statement because they are listed on the Global Index of Public Registers (Global Index). The implicit industry pressure from those who have signed proves to be an effective means of encouraging collective action, because it is clear to the entire industry, including regulators, who has signed and who has not. This Global Index also positively impacts accelerating the implementation of compliance measures lacking at certain firms so that they will be able to sign. Firms will not sign if they are not compliant but will likely communicate to their Central Bank or regulator the steps that they are taking so that they will be able to sign. The more institutions and firms who sign, the more pressure brought to bear on those who have not. While the Code is meant to be a self-compliant set of principles, there does remain an implied threat of regulation if the Code proves to be ineffective in curtailing unethical behavior.

Finally, when an institution signs the Statement of Commitment, it is a senior officer that is executing the document, often times a person outside of the FX division. This step introduces greater internal controls, because now someone separate from day-to-day trading has oversight of FX compliance commitments.

In the end, market behavior is the proof. This behavior has been changing ever since the financial crisis of 2008 - 2009 and the introduction of increased market scrutiny across the financial industry (for example: Dodd-Frank, EMIR, MiFid, etc.). However, the Code is the first set of compliance measures, albeit voluntary, to specifically address the FX market. This adherence is a necessary step as we embark on a new path of transparency and full disclosure with our clients’ best interests in mind.

Ed Monaghan, Executive Vice-President, Global Partnerships, 9th Gear Technologies. With over 25 years experience in global FX markets, Ed is currently the EVP of global partnerships at 9th Gear Technologies, the only B2B institutional marketplace enabling same day FX transactions with on-demand liquidity.