Guy Debelle: The global code of conduct for the foreign exchange
market (update)
Speech by Mr Guy Debelle, Assistant Governor (Financial Markets) of the Reserve Bank of
Australia, at the ASIFMA/GFMA Liquidity Conference (appearance via video link), Hong
Kong, 14 June 2016.
* * *
Thank you for having me here today to talk about the Global Code of Conduct for the Foreign
Exchange Market. As you may know, Phase 1 of the Code was launched in New York in late
May.1 Today I will reiterate the motivation for the work we are doing on the Global Code, 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 on previous occasions, the foreign exchange
(FX) industry is suffering from a lack of trust in its functioning. This lack of trust is evident
both between participants in the market, but 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 Global 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.
To that end, one of the guiding principles underpinning our work is that the Code should
promote a robust, fair, liquid, open, and transparent market. A diverse set of buyers and
sellers, supported by resilient infrastructure, should be able to confidently and effectively
transact at competitive prices that reflect available market information and in a manner that
conforms to acceptable standards of behaviour.
The work to develop the Global Code commenced in May last year, when the Bank for
International Settlements (BIS) Governors commissioned a working group of the Markets
Committee of the BIS 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.2
There are two important points worth highlighting: first, it's a single code for the whole
industry and second, it's a global code. It's intended to cover all 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. The Code is intended to apply to all aspects of the wholesale
foreign exchange market.
I am chairing this work, with Simon Potter of the Federal Reserve Bank of New York leading
the work on developing the code and Chris Salmon of the Bank of England leading the
adherence work. Our Working Group comprises representatives of the central banks of all
the major FX centres, drawing on the membership of the Markets Committee which is
comprised of heads of the market operations areas of the 15 major currency areas.3 Given
our roles, we are all very much interested in the effective functioning of the FX market. Again,
it is very much a global effort reflecting the global nature of the foreign exchange market.
This work is also very much a public sector-private sector partnership. In that regard, 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 non-bank participants, drawing from the various Foreign Exchange
Committees (FXCs) and beyond. Hence all parts of the market are being involved in the
drafting of the code to make sure all perspectives are heard and appropriately reflected.
At the outset we decided to split the topics we intend to cover in the Code into two parts. This
first phase covers areas such as ethics, information sharing, aspects of execution and
confirmation and settlement. The second phase will cover further aspects of execution
including e-trading and platforms, prime brokerage, as well as governance, and risk
management and compliance. We intend that the second phase will be completed in twelve
months, such that the full Code can be published in May 2017.
One factor influencing our choice of which topics to cover in the first phase was our
assessment of what issues the market was looking for clarity on sooner rather than later.
One example of this is around information sharing, where many market participants have
highlighted that they are unsure what information can be conveyed to counterparties and
other market participants. While it is clear (or at least should be) that disclosing the details of
a client's order book to a counterparty is not acceptable, market participants have noted that
there is much less clarity around what level of aggregation, say, is necessary in order to
convey market colour appropriately.
As a result, it appears some market participants are being very conservative in sharing
information, which can have implications for the effective functioning of the market. This is
notwithstanding the guidance provided in this area in the Global Preamble put out by the
global Foreign Exchange Committees, including the Australian Foreign Exchange Committee
(AFXC), in March 2015.4 The Global Code takes the material in the Global Preamble and
fleshes it out a bit more, including with some examples of what is, and isn't appropriate
communication, and why.
Similarly, there have been diverse opinions around what is appropriate behaviour in terms of
order handling. While there have been some very public instances of inappropriate behaviour
around order handling which have come to light in recent years, in other areas, the market is
seeking greater guidance as to what principles should be followed, including the different
standards that may apply depending on whether an intermediary is functioning as principal or
agent.5
This is one area that was not adequately covered in the pre-existing codes of conduct that
the various FXCs had endorsed for the FX market. It is an area where we are aiming to
provide the sought-after guidance. But we are not writing a procedures manual for order-
handling. Rather we are articulating principles that need to be taken into account. Individual
firms may then take these principles and reflect them in their own procedures manual. Our
aim in articulating these principles is to provide market participants with the framework in
which to think about how they handle stop-loss orders. The emphasis here is very much on
the word "think". The Global Code will not provide the answers to all your questions, but it
should help you ask the right questions.
In a similar vein, I will repeat a point that I have made a number of times in the past. One of
our most 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.
Adherence to the Code
Alongside drafting the Code, we have also been devoting considerable time and effort to
thinking about how to ensure widespread adoption of the Global 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.
As I said earlier, 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.
We laid out our overall approach to adherence to the Code in New York last month6 and we
intend to work closely with market participants in the coming year to facilitate the
development of market-based mechanisms which demonstrably embed the Global Code
within firms' culture and practices. These mechanisms need to be sensitive to existing law
and regulation and to the diverse nature of FX markets globally. Hence a 'one size fits all'
approach to adherence would not be appropriate. We need to strike the right balance
between respecting the existing diversity across different markets, and establishing globally
consistent and effective adherence mechanisms.
The success of the Global 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, making clear their
intention for the Global Code to become an integral part of the wholesale FX market.7
Furthermore the BIS central banks signalled their commitment by announcing that they
themselves will follow the Code, and that they expect that their counterparties will do so too.8
Our intention is that the complete Code will be released following the Global Foreign
Exchange Committee meeting 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 by the FXCs and market participants more generally.
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. I will have more to say about how
this ongoing evolution of the Code might occur in due course.
Conclusion
That, I trust, gives you a reasonable overview of the state of play on the Global Code.
A lot of work has been done to get us to this point. There is still a lot of work to be done.
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 how the market functions. I expect
that cooperative relationship will continue as we see this process through to its conclusion in
May next year.