Guy Debelle: The FX Global Code
Speech by Mr Guy Debelle, Deputy Governor of the Reserve Bank of Australia, at Tradetech FX
EU, Hybrid Conference, 8 September 2021.
* * *
Thanks to Matt Boge for his incredible assistance over my term as Chair, as well as Grigoria
Christodoulou and the other members of the GFXC Secretariat.
Tonight I will talk about the recently completed review and update of the FX Global Code. The
1
updated Code was released on 15 July. Tonight I will remind you about the important role the
Code plays in the foreign exchange (FX) market. I will summarise the parts of the Code that have
been updated and talk about the accompanying papers on pre-hedging and last look.
FX Global Code
The FX Global Code was launched in May 2017. It was a direct and important response to the
lack of trust the foreign exchange industry had been suffering on the back of a number of
instances of misconduct in the market and the associated multi-billion dollar fines. This lack of
trust was evident both between participants in the market and, at least as importantly, between
the public and the market. The lack of trust was impairing market functioning. The market needed
to move towards a more favourable and desirable location, and allow participants to have much
greater confidence that the market is functioning appropriately.
It is also important to remember what the alternative was in the aftermath of the scandals. There
was a decent chance authorities could conclude that a substantial regulatory response was
necessary to generate the desired improvement in market structure and conduct. But the Code
provided the opportunity for the FX market to address the lack of trust and market dysfunction.
The Code was developed through a public sector-private sector partnership. It was a joint effort
of central banks and market participants drawn from all parts of the markets: from the buy side,
including corporates and asset managers, and the sell side, along with trading platforms, ECNs
and non-bank participants. The membership was also from all around the world, drawing from
the various Foreign Exchange Committees (FXCs) across the globe comprising all the top 15 FX
markets by turnover, both advanced and emerging markets. The Global Foreign Exchange
Committee (GFXC) that maintains the Code has since expanded to 20 members.
The Code set out global principles of good practice in the FX market to provide a common set of
guidance to the market. The 55 principles in the Code cover ethics, information sharing, aspects
of execution including e-trading and platforms, prime brokerage, governance, risk management
and compliance, and confirmation and settlement.
The Code is principles-based rather than rules-based. There are a number of reasons why this
is so but, for me, an important reason is that the more prescriptive the Code, the easier it is to
get around. Rules are easier to arbitrage than principles. The more prescriptive and the more
precise the Code, the less people will think about what they are doing. If it's principles-based and
less prescriptive then market participants will have to think about whether their actions are
consistent with the principles of the Code.
The Code is not a procedures manual. Rather, the Code articulates principles that need to be
taken into account. Individual firms may then take these principles and reflect them in their own
procedures manuals. Our aim in setting out these principles is to provide market participants
with the framework in which to think about how they, for example, handle their orders. The
emphasis here is very much on the word 'think'.
These principles of good practice have helped to restore confidence and promote the effective
functioning of the wholesale FX market. In my view, the FX market is in a better place than it was
a few years ago. That is confirmed by surveys of market participants too, including the one
conducted by the GFXC a couple of years ago.
The Code has also been adopted by a number of securities regulators round the world as the
primary reference for their oversight of the FX market, including in the UK, in China and in my
own market Australia.
When we launched the Code, it was agreed that the Code would be reviewed by the GFXC every
three years to ensure it remained appropriate and to also ensure it stayed current with the
ongoing evolution of the FX market.
Hence, around two years ago, the GFXC surveyed market participants to assess what areas of
2
the Code needed to be reviewed. The primary response of market participants was that the
Code remained fit for purpose and changes should only be made as necessary. The strong
guidance was that changes to the Code should be contained to a few areas. The GFXC identified
a few key areas requiring review to ensure that the Code continues to provide appropriate
guidance and contributes to an effectively functioning market, and remains in step with the
3
evolution of the market. The GFXC also saw the opportunity to provide greater consistency and
usability in disclosures.
Over the past 18 months, various working groups of the GFXC, drawing on a diverse group of
market participants and central banks, have been working on the review. The proposed updates
to the Code have been through a number of rounds of feedback with market participants through
the FXCs round the world, as well as a public feedback process. I would like to thank the broad
range of market participants who provided us with feedback. I would particularly like to thank the
working groups for their hard work, especially given the challenging environment of the
pandemic.
The Review of the Code
Following this process of review and consultation with industry, the GFXC has published the
updated version of the Code. The July 2021 version of the Code replaces the earlier, August
2018 version. In total, 11 of the Code's 55 principles have been amended.
The GFXC has also developed disclosure cover sheets and templates for algo due diligence and
transaction cost analysis (TCA) to assist market participants in meeting the Code's principles for
disclosure and transparency. Additionally, the GFXC has published guidance papers on the
practices of Pre-Hedging and Last Look to support market participants in applying the Code's
principles in these areas.
One area that reflects the development of the market is the role played by Anonymous Trading.
The Code has been amended to encourage greater disclosure by those operating anonymous
platforms, including of their policies for managing the unique identifiers ('tags') of their users.
Anonymous trading platforms are also encouraged to make available the Code signatory status
of their users.
Recognising the value that data related to trading activity holds for market participants, the Code
now states that FX e-trading platforms (including anonymous platforms) should be transparent
about their market data policies, including which user types such data is made available to and at
what frequency and latency. Platforms are also encouraged to disclose the mechanisms and
controls by which they are managing or monitoring the credit limits of their users.
The risks associated with FX settlement are potentially very significant and have come back into
view again following the publication of the previous Triennial survey of FX turnover by the
BIS. Consequently, the GFXC identified a need to strengthen the Code's guidance on
Settlement Risk. Amendments have been made to place greater emphasis on the usage of
payment versus payment (PVP) settlement mechanisms where they are available and to provide
more detailed guidance on the management of settlement risk where PVP settlement is not
used. New language on the potential systemic consequences of a market participant's failure to
meet their payment obligations has been included to specifically discourage 'strategic fails'.
The Code's guidance on the information that providers of Algorithmic Trading or aggregation
services should be disclosing has been expanded to include the disclosure of any conflicts of
interest that could impact the handling of client orders (such as those arising from interaction
5
with their own principal market-making desk). More broadly, the GFXC believes the market
would benefit from greater uniformity of disclosures in this area. To enable clients to more easily
compare and understand the services being offered, market participants providing algorithmic
trading services are now encouraged to share their disclosure information in a standardised
format. To this end, the GFXC has published an Algo Due Diligence Template that market
participants may use, as appropriate.
Similarly, the GFXC believes that Transaction Cost Analysis would be aided by greater
harmonisation of data reporting within the industry. TCA is central to determining the quality of
execution received by users of algorithmic trading services. As the barriers to conducting TCA
can be high, a standardised information set could be particularly helpful for less-sophisticated
clients or those with limited resources. The GFXC has published a Transaction Cost Analysis
Data Template that should assist in bringing about greater standardisation.
Disclosure Cover Sheet and Templates for Algo Due Diligence and Transaction Cost
Analysis
Clear and accessible disclosures allow market participants to make informed decisions about
the other market participants with whom they interact. A key area of focus for the GFXC was the
challenges market participants faced in accessing and evaluating the large amount of varied
6
disclosure information being made available to them. To address this, the GFXC has created
standardised Disclosure Cover Sheets for liquidity providers and for FX e-trading platforms. They
have been developed to improve the accessibility and clarity of existing disclosures. You should
be able to more easily compare and contrast disclosures across a set of standardised
information.
The Code has also been expanded to include explicit references to the provision of information
about trade rejections. Market participants should be making clients aware of the basis on which
trades might be rejected, and should be keeping records of the reasons behind electronic trade
rejections.
The Disclosure Cover Sheet, the Algo Due Diligence Template and the TCA Data Template can
support market participants in meeting the range of disclosure and transparency principles within
the Code. They are available on the GFXC website and their use is voluntary. Market participants
will be able to post their Disclosure Cover Sheet alongside their Statement of Commitment on
participating public registers, further supporting accessibility of disclosure.
Guidance Papers on Pre-Hedging and Last Look
Principles 11 and 17 of the FX Global Code describe good practice for market participants using
pre-hedging and last look. They continue to be areas that generate strong and sometimes
diverse views across market participants. There was demand for further clarity on the
appropriate usage of these trading practices. Hence, the GFXC has published separate guidance
papers on these topics. These papers are intended to be read alongside the Code in its entirety.
(That is, there are other principles in the Code that cover practices relevant to pre-hedging and
last look, not just Principles 11 and 17.)
The Guidance Paper on Pre-Hedging discusses the circumstances in which pre-hedging could
be used in the FX market and the controls and disclosures that could help align pre-hedging
activity with the Code. As the paper states, in utilising pre hedging, liquidity providers are
expected to behave with integrity both in executing their client activities and in supporting the
functioning of the FX market. While the intent of any liquidity provider conducting pre hedging
should be to benefit the liquidity consumer in executing an anticipated order, there is no
guarantee that it will always result in a trade, or a trade at a price that is beneficial to the liquidity
consumer. Pre hedging done with no intent to benefit the liquidity consumer, or market
functioning, is not in line with the Code and may constitute illegal front running.
The Guidance Paper on Last Look has generated a larger volume of discussion and feedback
than the other parts of the review. The guidance paper reinforces Principle 17 of the Code by
emphasising that the last look be applied in a fair and predictable manner. The guidance paper
does move the industry forward in providing greater clarity about the intent of Principle 17. In
addition, the disclosure sheets provide liquidity consumers with the capacity to better assess in a
consistent manner, the way they are being treated in the last look window.
Last look is intended to be used for the price and validity checks only, and for no other purpose.
LPs should apply the price and validity check without delay. Anything else that prolongs the last
look window is contrary to the intent of the Code. At the end of the guidance paper, it outlines
some areas that liquidity consumers should monitor to assess whether last look is being applied
appropriately.
We did consider whether to state what some of those other purposes might be that you should
not use last look for. We have not done so for a number of reasons. First is that the Code is
principles-based, not regulation, and the principle underlying last look makes it clear that there is
no other legitimate purpose beyond price and validity checks. Second, if we had a description of
some activities that we don't regard as acceptable, then unless we had a completely exhaustive
list, which is close to impossible, we run the risk of providing a safe harbour for anything that
wasn't on the list.
In that regard, some have said we should be more prescriptive about last look. But again, I would
remind you that the Code is principles-based. It is not regulation.
Another area of debate was around the word 'promptly'. Neill Penney, the co-vice chair of the
GFXC, makes the point that the use of the word 'immediate' could be interpreted by the market
as the GFXC indicating that all liquidity providers needed to upgrade their technology to move to a
zero hold time. That's not an outcome we are after.
The disclosure cover sheets ask about the length of last look window. Because the technology
has not yet been invented to run processes without taking any time at all, requiring that length to
be zero would ban last look. Some people in the market use the term 'hold time' to mean length
of last look window. In that sense a non-zero hold time is clearly consistent with the Code.
Decisions should be prompt and may well be within small fractions of a second in many cases,
but cannot truly be immediate. Others use hold time or additional hold time to mean a deliberate
delay before starting the price and validity check. Such a delay is not consistent with the code;
the guidance paper makes clear LPs should apply the price and validity check without delay.
Because of the inconsistent use of hold time, the guidance paper and cover sheets have
deliberately avoided relying on market participants having a single definition of it. If someone in
the market talks to you about hold time, ask them to confirm what they mean before replying.
Moreover, trying to define a time period doesn't work because it's going to differ in different
circumstances, in different markets, with different latencies and different systems, so I don't see
that as feasible. At some level, this is semantics, but the combination of promptly and without
delay, makes the intent clear in my view.
As I mentioned, alongside the paper, the GFXC published standardised disclosure cover sheets
for liquidity providers which includes a section on last look practices. The intent is to provide a
standard form so that liquidity consumers can more easily compare and contrast the offerings
from LPs.
Liquidity providers adhering to these principles and providing transparency about their practices
though the disclosure cover sheets should help to give their clients greater clarity about the
process. Liquidity consumers should then use this information to evaluate their execution, ask
questions of their liquidity provider's last look process, and evaluate whether to trade with liquidity
providers that are using last look.
Finally, there is clearly continuing debate in the industry about the application of last look. The
GFXC intends to continue to monitor the application of last look and the effect of the guidance
paper, and take additional action if necessary. This may include providing further guidance going
forward, potentially via updates to Principle 17.
Statement of Commitments
Almost 1,100 entities globally have signalled their adherence to the Code's principles by signing a
Statement of Commitment. With the publication of the updated Code, the GFXC is encouraging
market participants to consider renewing their Statements of Commitment, having regard to the
nature and relevance of the updates to their FX market activities.
The GFXC acknowledges that the changes to the Code will affect certain parts of the market
more than others. For those most affected by the changes, we would anticipate a period of up to
12 months for practices to be brought into alignment with the updated principles. We would
expect that the disclosure cover sheets would be posted alongside the Statement of
Commitments on a similar timeframe, if not sooner.
Conclusion
To conclude, the GXFC has completed the three-year review of the FX Global Code. The Code
has been updated to remain current with the ongoing evolution of the FX market. It will continue to
serve its important role of setting the standard for good practice.
But to do so, it requires that you as market participants continue to reflect the principles of the
Code in your activities in the FX market. I would strongly encourage you to familiarise yourself
with the changes to the Code, and particularly to make good use of the disclosure templates.
In the end, we all have a strong common purpose in ensuring that the FX market continues to
operate effectively and with integrity.
For more on algo trading, see BIS (2018), 'Monitoring of Fast-Paced Electronic Markets', report submitted by a
Study Group established by the Markets Committee, September. Available at <www.bis.org/publ/mktc10.pdf>.
6
Hauser A (2019), 'Run Lola Run! The Good, the Bad and the Ugly of FX Market Fragmentation - and What To Do
About It', Speech at TradeTech FX 2019, Barcelona, 13 September. Available at
<www.bankofengland.co.uk/speech/2019/andrew-hauser-panellist-at-trade-tech-fx-europe-barcelona>.