Code of conduct - for FX traders it’s principles that count | Wolters Kluwer Financial Services
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  • Code of conduct - for FX traders it’s principles that count

    By Selwyn Parker

    Published August 29, 2017

    It’s taken two years of sometimes 24-hour round-the-planet discussion by the main participants to produce the FX Global Code but it’s now being embedded right across this $15 trillion-day market.

    A response to the manipulation scandals of the last few years, some of which are still under investigation, it’s the blueprint for a trustworthy foreign exchange market. And it’s genuinely global, applying in Europe, USA the Asia-Pacific and other regions.

    The blueprint brings important and special challenges for compliance officers. The main one is that the code is based on principles rather than rules. This means, as we’ll see, that the primary obligation of meeting the code falls on the firm rather than on the regulator.

    But first, considering the blatantly unethical and self-serving action of some traders in the past, often with the tacit approval of their bosses, the natural question is whether a principles-based code can possibly work. The deputy governor of the Reserve Bank of Australia, Guy Debelle, certainly thinks so. He headed up the committee that drew up the code of conduct as well as the adherence system which it’s hoped will keep the wholesale FX markets honest.

    Although the code is in its early stages, the Australian’s confidence looks well placed on two main grounds. First, this isn’t just the work of regulators, central banks and other government entities. Rather, it’s an industry-wide creation, a fact that bodes well for its success. Every organisation that mattered got involved in the development process including trade bodies representing corporate treasurers and asset managers, trading platforms, electronic brokers, as well as the main regional foreign exchange committees.

    And second, as Debelle points out, the fact that this is a global code should bind all the market participants into its observance. (The code automatically replaces the existing, flawed codes.) “It is there for the sell side, the buy side, non-bank participants and the platforms,” explains Debelle. “It reaches around the globe and across the whole industry.”

    Nor is it a set of principles that was drawn up by a handful of centres such as London, New York and Frankfurt to be imposed on the rest of the world. The top 16 foreign-exchange centres were deeply involved from the start including emerging markets in the Asia Pacific and elsewhere. The code was also democratically developed – it attracted more than 10,000 comments, all of which were taken into account. Interestingly, nearly all of these observations boiled down to a relatively small number of issues that were embodied in the main principles.

    Trump’s complaint

    It should be pointed out that the code is a response to manipulation by individuals in their own or their firms’ narrow interests. As such, it’s got nothing to do with the accusation by President Trump in the early days of his incumbency that Germany was exploiting the euro at the expense of the US and other countries in the EU.

    This harped back to the debate of a decade ago about “currency wars” being fought between nations in an effort to deliberately weaken or strengthen their own currencies in the interests of trade or other economic reasons. Although the president of the European Central Bank Mario Draghi told Mr. Trump, in so many words, that he was wrong, there is an argument that some countries such as China intervene in the markets, for instance to build up their foreign exchange reserves.

    There’s nothing illegal about this kind of intervention, but it makes some central banks nervous and it’s why certain economists foresee the development of a different kind of code in the future that requires countries to be more open about their strategies.

    The principled trader

    Meantime the implementation of the code on a firm-wide basis will test the mettle of compliance officers in FX departments. This is because it turns around normal post-crisis practice in ensuring good behaviour. Instead of blindly following an exhaustively defined set of rules, the onus will be on individuals to figure out if they’re doing thing. Put simply, in executing a trade, the desk jockeys will have to decide if they’re upholding the principles embedded in the code. And since the complete code is built around just 55 easily understood principles, traders should be able to recite them off by heart.

    So, this is not a procedures manual but a guide book. And for a good reason. As Debelle puts it: “The more prescriptive the code is, the easier it is to get around. Rules are easier to arbitrage than principles. The more prescriptive and more precise the code, the less people will think about what they are doing.”

    In the long run adherence to the code will come down to the market. If firms don’t make a public commitment to it – and there are procedures for doing that, their counterparties will obviously want to know why. And clearly, firms that are doing the right thing will make sure to advertise their integrity through public registries for all to see. Insiders believe that it won’t take long for regional foreign exchange committees to insist that members sign up to the code in word and deed.

    Compliance officers must now keep an eye on the work of a new body called the Global Foreign Exchange Committee, in effect the foster parent of the code. Now that the blueprint has been born, so to speak, the GFXC is taking it over and will fine tune it. For instance, the GFXC is considering the contentious issue of trading in the “last-look window”. This is about dealers having the discretion to reject client orders even though it may be at the client’s disadvantage. Currently the code permits “last-look” but will probably require more transparency, for instance in the form of a full explanation. A decision should be made around the end of September.

    Restoration of trust

    There could be a handsome economic return from observance of the code. If it restores trust in the FX markets, the code might boost volumes of currency dealing around the world. As Harpal Sandhu, founder and CEO of trading facility Integral Development Corporation, told GT News, the forum for corporate treasures: “We’ve seen this kind of effect of transparency on other industries such as the cellular phone market, which now delivers greater pricing choice for consumers. This is because ultimately transparency will lead to the democratisation of foreign exchange, which in the long-term benefits everyone by creating greater liquidity.”

    After the run of scandals, let’s all hope so.

    About the author: Selwyn Parker is an author of books on finance and business topics, a specialist in financial history, and regular contributor to newspapers and magazines. Based in Spain, France and the UK, he focuses mainly on European developments. His latest book, The Great Crash, is a new history of the Great Depression that among other things explains the rise of regulation in the form of the SEC and related authorities. Selwyn is a regular contributor to Wolters Kluwer Financial Services.  

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