Guy Debelle: The global code of conduct for the foreign exchange
market
Address by Mr Guy Debelle, Assistant Governor (Financial Markets) of the Reserve Bank of
Australia, to the FX Week Australia conference, Sydney, 17 March 2016.
* * *
Today, I will talk about the Global Code of Conduct for the Foreign exchange market. I will
reiterate the motivation for the work we are doing, 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 is aiming to set 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 address the lack of trust as well as 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.1
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. In the Code itself, we spell out what we actually mean by the wholesale FX
market. The one noteworthy part of the FX industry to which the Code generally doesn't apply
is the retail market, as that is generally governed by retail-specific regulation in the relevant
jurisdiction.
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.2 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, including
Australia, on both 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. The
first phase is the material we intend to put out in two months' time in May. It covers areas such
as ethics, information sharing, execution (including mark-up) and confirmation and settlement.
The second phase will cover topics such as governance, risk management and compliance,
as well as further aspects of execution including e-trading and platforms (including last look),
prime brokerage, and the unique features of FX swap, forward, and option transactions.
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 last year.3 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.4
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.
So where we are up to in the process?
Last week we circulated for comment the second draft of phase one of the Code via the various
FXCs including the Australian FXC (and central banks in those countries on the Working Group
without an FXC). This second draft incorporates comments on the first draft of the Code that
we had circulated at the beginning of February. The first draft attracted over 1,400 comments.
The comments were almost universally constructive and very supportive of the whole
endeavour. I would like to thank those who took the time to provide them.
In writing this second draft, we and the market participants group took full account of all of
these comments. Those who provided them can rest assured we have taken heed of them.
But in saying that, you may not see your comment directly embodied in the redrafting. This in
part, reflects the diversity of views on some issues in the Code. That said, we have sought to
incorporate the overall feedback in a manner that best reflects the objectives for the Code that
I set out above, namely that the Code should promote a robust, fair, liquid, open, and
transparent market.
The comments on the second draft will be gathered over the next week or so. We will then
take account of them and produce a revised draft early in April. There will be one final round
for 'fatal flaw' comments after that before seeking endorsement by the various FXCs of a
document we can take to the Global Foreign Exchange Committee meeting in New York on
25 May. For example, in Australia, we will be looking for the AFXC endorsement of the Code
at our next meeting in early May. Following the meeting of the Global Foreign Exchange
Committee, the first phase of the Global Code will be publically released.
We have already started on the work of drafting the material in phase two of the Code. We will
continue with that over the next year, again having a number of rounds of comment from
market participants through the FXC process.
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.
Adherence to the code
At the same time as we have been drafting the Code, we have also been devoting considerable
time and effort to develop adherence mechanisms which promote and incentivise widespread
adoption of the Global Code by market participants. Clearly, that has been an issue with the
various existing industry codes that have been in place in a number of markets over many
years. It is very evident that they were often ignored, wilfully or otherwise. For an industry code
to have value in affirming appropriate norms of behaviour, it has to become effectively adopted
in the marketplace.
While adherence to a single, consistent code of good practice is widely regarded to be in the
interests of the market, the Global Code will be voluntary. As I said earlier, we are working with
the industry to produce a voluntary, 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.
There is already a substantial body of law and regulation that applies to the FX activities of
many market participants, and this varies significantly across jurisdictions. This variation,
coupled with the diverse nature of FX markets globally, means that a 'one size fits all' approach
to adherence would not be appropriate. The final framework for adherence will need to strike
the right balance between respecting the existing diversity across different markets, and
maintaining consistency with regard to what is a global initiative.
In that regard, we have articulated three principles which underpin our overall approach to
adherence.
• Universal: The Global Code should apply to all wholesale FX market participants,
based on the activities they undertake and subject to compliance with any applicable
regulations. We have been working hard to incorporate the perspective of all types of
wholesale FX market participants into the draft Code, and we want it to be widely
applicable across the market.
• Proportionate: How wholesale FX market participants adhere, and demonstrate their
adherence, to the Global Code should be proportionate and appropriate to the type of
participant and the context of the local financial markets.
• Transparent: the mode of adherence should be transparent, to enable monitoring and
market discipline.
It is worth stressing that the "proportionate" principle is not designed to lower the bar - it is
designed to reflect the differences in the type and volume of market activities of certain market
participants and the variation in FX markets worldwide.
The concrete details of the adherence mechanisms remain a work in process. We will have
more to say on this in New York in May. At this stage, our thinking is that there is unlikely to
be a single adherence mechanism but rather a suite of mechanisms.
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.