Guy Debelle: The Global Code of Conduct for the Foreign Exchange Market
Central bank: rba | Type: speech | Date: 2016-11-11

## Guy Debelle: The Global Code of Conduct for the Foreign Exchange MarketRemarks by Mr Guy Debelle, Assistant Governor (Financial

Markets)

of

the

Reserve

Bank

of Australia, to FINSIA's Regulators Panel, Melbourne, 11 November 2016.*

*

*Today I am going to talk about the Global Code of Conduct for the Foreign Exchange Market, which has been consuming a large part of my sleeping hours for the past 18 months.

As I hope most

of

you

know,

Phase

1

of

the

Code

was

launched

earlier

this

year

in

New

Y ork.

The complete Code will be released in London at the end of May 2017.

It is pretty easy to find.

It is available

on

the Australian

Foreign

Exchange

Committee

(AFXC)

website

or

via

the

Bank

for International Settlements (BIS) website. 1Today I will reiterate the motivation for the work we are doing on the Code, why you all should be interested in it, and then update you on where we are at with the process and outline the way forward.Why is the work going on?

As I have stated before, the foreign exchange (FX) industry has been suffering

from

a

lack

of

trust

in

its

functioning.

This

lack

of

trust

is

evident

both

between participants in the market, and at least as importantly, between the public and the market.

The market needs to move toward a more favourable and desirable location, and allow participants to have much greater confidence that the market is functioning appropriately.A well-functioning foreign exchange market is very much in the interest of all market participants.

This clearly includes central banks, both in their own role as market participants but also as the exchange rate is an important channel of monetary policy transmission.

In a globalised world, the foreign exchange market is one of the most vital parts of the financial plumbing.The Code sets out global principles of good practice in the foreign exchange market to provide a common set of guidance to the market, including in areas where there is a degree of uncertainty about

what

sort

of

practices

are

acceptable,

and

what

are

not.

This

should

help

to

restore confidence and promote the effective functioning of the wholesale FX market.The

work

to

develop

the

Code

commenced

in

May

last

year,

when

the

BIS

Governors commissioned a working group of the Markets Committee of the BIS (which I Chair) to facilitate the establishment of a single global code of conduct for the wholesale FX market and to come up with mechanisms to promote greater adherence to the code. 2Our Working Group comprises representatives of the central banks of all the major FX centres.

This work is also very much a public sector-private sector partnership.

We are being ably and vigorously supported in this work by a group of market participants, chaired by David Puth, CEO of

CLS.

The

group

contains

people

from

all

around

the

world

on

the

buy

side,

including corporates and asset managers, and the sell side, along with trading platforms, ECNs and nonbank participants, drawing from the various Foreign Exchange Committees (FXCs) and beyond.

Hugh Killen from Westpac is the Australian member of this group, representing the Australian Foreign Exchange Committee (AFXC).

All parts of the market are being involved in the drafting of the code to make sure all perspectives are heard and appropriately reflected.There are two important points worth highlighting: first, it's a single code for the whole industry and second, it's a global code.On the first point, the Code is replacing the existing codes of conduct that have been present in the FX market, including the ACI model code used here in Australia.

Importantly, the Code coversBIS central bankers' speechesall of the wholesale FX industry.

This is not a code of conduct for just the sell side.

It is there for the sell side, the buy side, non-bank participants and the platforms; its breadth is both across the globe and across the whole structure of the industry.Hence the Code is relevant for all of you here in this room.

The way it is relevant will depend on your engagement with the market.

The guidelines for appropriate conduct are relevant for the buy side as well as the sell side.

On the buy side it will also help to give you guidance as to what you can reasonably expect from your counterparty as you transact your FX business.As I mentioned earlier, the first phase of the Code was released earlier this year.

It covers areas such as ethics, information sharing, aspects of execution and confirmation and settlement.

We are

well

advanced

with

the

second

phase

which

is

covering

further

aspects

of

execution including e-trading and platforms, prime brokerage, as well as governance, and risk management and compliance.We are currently in the process of incorporating nearly 2000 comments received from market participants on the draft that we circulated in early October.

We will be sending out a revised version for comment in the first week of December.

The distribution to market participants will be principally through the FXCs but also through other industry associations as well.

Again, we are endeavouring to ensure all perspectives are appropriately reflected in the Code.The aim is for the full Code to be published in May 2017 and we are on track to achieve that.

## Adherence to the CodeAlongside drafting the Code, we have also been devoting considerable time and effort to thinking about how to ensure widespread adoption of the Code by market participants.

Clearly, that has been an issue with the various existing codes that have been in place in a number of markets over many years.

It is evident that they were ignored on occasion, wilfully or otherwise.One of our central aims in drafting the Code is for it to be principles-based rather than rulesbased.

There are a number of reasons why this is so, but for me, an important reason is that the more prescriptive the Code is, the easier it is to get around.

Rules are easier to arbitrage than principles.

If it's not expressly prohibited or explicitly discouraged, then it must be okay seems to be the historical experience.

Moreover, the more prescriptive and the more precise the code is, the less people will think about what they are doing.

If it's principles-based and less prescriptive then,

as

I

just

said,

market

participants

will

have

to think

about

whether

their

actions

are consistent with the principles of the Code.So, we are working with the industry to produce a principles-based code of conduct rather than a set

of

prescriptive

regulatory

standards.

It

will

not

impose

legal

or

regulatory

obligations

on market participants, nor will it supplant existing regulatory standards or expectations.

But we do expect the principles in the Code to be understood and adopted across the entire FX market.Our approach to adherence has a number of dimensions.

We laid out our overall approach to adherence to the Code in New York in May. 3One

dimension

is

market-based

adherence

mechanisms.

An

important

element

of

discipline should come from the market itself and we are working closely with market participants on this.

The adherence to a voluntary code will only come about if firms judge it to be in their interest and take the practical steps to ensure the code is embedded in their practices.Firms

will

need

to

take

practical

steps

such

as

training

their

staff

and

putting

in

appropriate policies and procedures.

We will probably recommend widespread use of attestations by firms about their adherence to demonstrate how widely the Code is followed.

Firms are more likely to adhere to the Code if they believe that their peers are doing so too.BIS central bankers' speechesWithout blaming them for what occurred, more scrutiny from counterparties about how their FX transactions were being executed may have helped to reduce the incidence and severity of the market abuses that occurred in the past.

FX transactions were sometimes regarded as ancillary to the core business, notwithstanding their potential impact on returns.Ultimately

the

success

of

the

Code

in

promoting

integrity

and

restoring

confidence

in

the wholesale FX market lies in the hands of its participants.

That is why the Global FXCs issued a joint statement of support at the launch of the Code in New York as well as stating their intention to make adherence to the Code a likely requirement of FXC membership.

That would ensure the Code is embedded at the core of the FX market, but it is also important that it extends beyond that, and that there is, at the very least, an awareness of it across all market participants. 4A second dimension of adherence is that the BIS central banks have signalled their commitment by

announcing

that

they

themselves

will

follow

the

Code,

and

that

they

expect

that

their counterparties will do so too.

To that end, the RBA will no longer transact in the FX market with those that don't commit to adhere to the Code after its release in May. 5A third dimension of adherence is that we are talking to regulators in our various jurisdictions as to

how

they

might

use

the

Code

in

monitoring

market

conduct.

In

Australia,

ASIC

is

very supportive of the development of the Code and is considering how it might utilise the Code in its market surveillance.

The FCA in the UK is considering how they might incorporate the Code in the Senior Managers Regime there.

## ConclusionWe are on track to complete the Code so that it will be released in London in May 2017.

At the end of that process, for the Code to be effective and for it to achieve what we want it to achieve, it will need to be accepted and endorsed across the full spectrum of market participants.That said, the process does not really end, because as the foreign exchange market continues to evolve, the Code will need to evolve with it.The work to date has reflected a very constructive and cooperative effort between the central banks and market participants.

All of us recognise the need to restore the public's faith in the foreign exchange market and the value of the Global Code in assisting that process and also in helping improve market functioning and confidence in the market.See . 1See . 2See .

See also C Salmon (2016), 'Rebuilding Trust through the 'FX Global Code': Reasons for optimism', available at , Speech given at the ACI UK Square Mile Debate, London, 7 September; and S Potter (2016), 'The Role of Best Practices in Supporting Market Integrity and Effectiveness', available at , Remarks at the 2016 Primary Dealers M eeting, Federal Reserve Bank of New York, New York City, 7 September. 3See . 4See . 5BIS central bankers' speeches