BIS’s Foreign Exchange Working Group and private sector working on common guidelines for market.
Foreign exchange (FX) is the biggest financial market in the world, and it has become critical to an ever-growing number of corporates. However, it is highly decentralized and regulations impacting FX vary widely. In the last few years FX has been a highly volatile market, and currently numerous lawsuits have been filed against banks accused of rigging the FX market.
The Bank for International Settlements’ Foreign Exchange Working Group (FXWG) was established in July 2015 under the auspices of the Markets Committee. Its goal is to identify global “good practices and processes” in the wholesale FX market to supplement any and all local laws, rules and regulation in jurisdictions globally. Chaired by Guy Debelle, assistant governor at the Reserve Bank of Australia, the working group comprises senior representatives for market operations from 21 central banks representing the 15 largest currency areas.
The FXWG formed the Market Participants Group (MPG), chaired by David Puth, CEO of the CLS Bank International, to engage a broad set of market participants to develop and promote the code of conduct. The MPG comprises mostly financial institutions, but nonfinancial institutions including Rolls Royce and Airbus are also participating.
The code will be organized around six principles: ethics, governance, information sharing, execution, risk management and compliance, and confirmation and settlement process—that will apply to all FX market participants. The FXWG laid out the first phase of new principles May 26 (https://www.bis.org/mktc/fxwg/gc_may16.pdf), and a final phase is scheduled for publication in May 2017.
In an email exchange with iTreasurer, Mr. Puth explained the code’s aims, how it may impact corporates, and how corporates can participate in creating the code.
iTreasurer: Please describe the main complications or problems in the FX market that a single code of conduct will aim to solve.
David Puth: The first phase of the global code has been developed not to address any single issue or set of issues, nor should it be viewed as the only way in which to improve the overall functioning of the market.
The foreign exchange market operates across borders 24 hours a day, 5 1/2 days a week. Due to its size, diversity of participants and global reach, regulation alone is not the answer to enable the market to operate in the most efficient manner.
This set of global principles of good practice in the foreign exchange market (Global Code) is being developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale FX market. It will provide guidance on best practice and appropriate conduct and promote a robust, fair, liquid, open and appropriately transparent market.
To achieve a truly harmonized code, it was clear from the outset that these principles should be developed through international co-operation. The MPG was created to support the FXWG in developing the code and to bring together representatives from across the FX market in order to gain an accurate view of the market’s needs.
Global participation is crucial, as it allows us to gather information and feedback from a cross-section of the market and ensure the final code of conduct is relevant and applicable across all regions. In addition, it allows us to represent the market as a whole and reduces the possibility of regional differences, which could drive trading institutions to less-stringent regulatory jurisdictions.
iT: How regularly does the FXWG and MPG meet?
DP: The MPG has worked closely with the FXWG throughout the process. And the public/private partnership has been a cornerstone of the process from the outset. In addition to the joint meeting that took place in London in September of last year, the MPG and FXWG met in Tokyo at the end of January 2016. The groups have met regularly by phone as the code has evolved.
iT: What decisions have been made so far?
DP: We have agreed to split the delivery of the Global Code into two parts. Phase one was released on May 26 and the second phase will be completed in May 2017.
The Global Code is organized around six leading principles: ethics, governance, information sharing, execution, risk management and compliance, and confirmation and settlement processes.
iT: Can you describe a general direction the initiative is headed in, both in terms of what the code will comprise, as well as potential mechanisms to encourage adherence?
DP: The new code is principles, rather than rules, based. This provides flexibility and a greater likelihood of producing behavior that fulfills our objectives. Rules that are prescriptive may provide certainty, but can equally lead to gaps, inconsistencies and rigidity that could result in unintended consequences.
iT: How will a single code of FX conduct benefit corporate end users?
DP: For the first time, all market participants, including corporates, will adopt a single set of conduct principles that is intended to improve the overall effectiveness of the FX market. For example, it will provide greater clarity on areas such as market color and information sharing and offer guidance on what can and cannot be discussed with their counterparties and banks that trade on their behalf.
iT: How is a single FX code likely to impact how corporates approach the FX market and interact with it?
DP: The MPG is working in close partnership with both the FXWG and the regional FX committees to formulate frameworks, develop clear and consistent guidance on market issues and co-ordinate responses from participants that will assist market participants across all asset classes in operating effectively within the FX market.
Three out of 33 members of the MPG are nonfinancial corporates.
iT: How did the FXWG arrive at that number to represent nonfinancial companies?
DP: The membership of the MPG has been fluid. It was assembled by the FXWG to reflect the broadest range of market participants. Throughout the process the FXWG and the MPG sought input from a number of external groups as well, notably through the FX committees that also include nonfinancial corporate members.
iT: How can nonfinancial corporates participate in the development of a single code?
DP: The MPG was designed to address the needs of all participants operating in the foreign exchange market and I feel confident that the views of nonfinancial corporates are being actively represented in our discussions. In addition to their involvement in the MPG, there are a number of nonfinancial corporates working with local and regional committees, and industry associations which will help take the code of conduct further forward.
As a group, we are conscious that our final product needs to reflect the genuine needs and requirements of the market, and value all opportunities to evaluate feedback from the market.