FX Global Code of Conduct: Building on Five Years of Progress

The BIS
Foreign Exchange Working Group published the FX Global Code of Conduct on 25 May 2017 with the aim of providing
a common set of guidelines to promote the integrity and effective functioning
of the wholesale FX market.

Since its
introduction five years ago, a lot has changed in the FX market. The way we
communicate, collaborate and the tools and technology we use have all been
transformed.

The code
itself has also evolved. The Global Foreign Exchange Committee (GFXC) updated 11 of the Code’s 55 principles in July 2021 to strengthen its guidance on
anonymous trading, algorithmic trading, transaction cost analysis, disclosures
and settlement risk.

There is
no doubt that the FX Global Code has improved practices across the industry
while promoting transparency and spurring debate in key areas such as
transaction cost analysis. But how can the GFXC build on achievements to date
and maintain this momentum in years to come?

Promoting adoption
among buy-side and corporates

One of the
most important features of the FX Global Code is that is does not impose any
legal or regulatory obligations on market participants. Instead, it’s a
voluntary code of conduct designed to set out best practice and processes.

So, when
it was first introduced, the big question was whether market participants would
sign up and adhere to a voluntary code.

The BIS
and many central banks took on the responsibility of driving adoption among key
market participants. Some even required counterparties to sign the code and threatened to cut
ties with those that didn’t comply.

Combined
with a general feeling that the industry needed to do better by standardising
best practice and promoting transparency, this led to widespread adoption and there
are now over 1,100 signatories on the global register.

But before
we start patting ourselves on the back and saying job well done, it’s important
to note that very few buy-side and corporate firms have signed up the FX Global
Code.

In fact, of
the 1,100+ signatories, there are only 80 asset managers, 30 corporates and 13
pension funds. In many cases, these types of firms aren’t aware of the code
despite needing the code the most, given that many continually get a bad deal
and struggle to achieve best execution and full transparency.

The GFXC recognised
the lack of buy-side adoption as an issue back in 2018 and it set up a specific outreach working group to facilitate more adoption among
these types of firms. At the time, only 60 buy-side firms had signed up the
code. Fast forward four years and only 93 have signed up.

It’s vital
that we increase awareness of the code among buy-side firms and corporates as
it exists for their protection. It enables them to scrutinise their liquidity
providers and partners’ processes against best practice, ensuring they achieve
best execution and get the transparency they deserve.

Renewing
commitments to the code

In July
2021, the GFXC published the updated version of the code following an extensive
process of consultation with the foreign exchange committees around the world
and a public request for feedback in April of the same year.

Guy Debelle, GFXC’s then chair, said: “The changes to the Code will ensure
that the Code continues to promote the integrity of the market. Many of the
changes are designed to bring about greater transparency in an increasingly
complex market.”

The GFXC
acknowledged that these changes would affect certain parts of the market more
than others and said it anticipated that it would take around 12 months for
practices to be brought into alignment with updated principles. And, this year,
we have started to see some institutions, including the Bank of England, renew
their commitment to the new code which is positive.

What I
would like to see is the GFXC requiring all signatories to review and renew
their commitments to the updated FX Global Code, whether they’re affected by
the new changes or not.

Many
signed up five years ago and so much has changed in that time with the advent
of remote working, adoption of new technology and the great resignation which
saw many change jobs.

A formal
renewal process would help ensure that all signatories remain compliant and
committed to the code and its principles.

Focusing
on smaller market participants

The FX
Global Code has been welcomed by the FX community and provided a forum for
participants to debate a range of issues, from algorithmic trading to last look
and TCA.

That said,
it’s important we don’t rest on our laurels and see 1,100+ signatories as
enough. We need to focus on the smaller market participants (e.g. buy-side and
corporates) as together they make up a significant portion of the market. These
are the firms which benefit most from the best practice set out in the code
and, as an industry, we need to make sure we bring them on this journey with
us.

In
summary, we believe the FX Global Code should be for the whole FX market, not
just for the wholesale FX market. There’s still more to do to get there.

The BIS
Foreign Exchange Working Group published the FX Global Code of Conduct on 25 May 2017 with the aim of providing
a common set of guidelines to promote the integrity and effective functioning
of the wholesale FX market.

Since its
introduction five years ago, a lot has changed in the FX market. The way we
communicate, collaborate and the tools and technology we use have all been
transformed.

The code
itself has also evolved. The Global Foreign Exchange Committee (GFXC) updated 11 of the Code’s 55 principles in July 2021 to strengthen its guidance on
anonymous trading, algorithmic trading, transaction cost analysis, disclosures
and settlement risk.

There is
no doubt that the FX Global Code has improved practices across the industry
while promoting transparency and spurring debate in key areas such as
transaction cost analysis. But how can the GFXC build on achievements to date
and maintain this momentum in years to come?

Promoting adoption
among buy-side and corporates

One of the
most important features of the FX Global Code is that is does not impose any
legal or regulatory obligations on market participants. Instead, it’s a
voluntary code of conduct designed to set out best practice and processes.

So, when
it was first introduced, the big question was whether market participants would
sign up and adhere to a voluntary code.

The BIS
and many central banks took on the responsibility of driving adoption among key
market participants. Some even required counterparties to sign the code and threatened to cut
ties with those that didn’t comply.

Combined
with a general feeling that the industry needed to do better by standardising
best practice and promoting transparency, this led to widespread adoption and there
are now over 1,100 signatories on the global register.

But before
we start patting ourselves on the back and saying job well done, it’s important
to note that very few buy-side and corporate firms have signed up the FX Global
Code.

In fact, of
the 1,100+ signatories, there are only 80 asset managers, 30 corporates and 13
pension funds. In many cases, these types of firms aren’t aware of the code
despite needing the code the most, given that many continually get a bad deal
and struggle to achieve best execution and full transparency.

The GFXC recognised
the lack of buy-side adoption as an issue back in 2018 and it set up a specific outreach working group to facilitate more adoption among
these types of firms. At the time, only 60 buy-side firms had signed up the
code. Fast forward four years and only 93 have signed up.

It’s vital
that we increase awareness of the code among buy-side firms and corporates as
it exists for their protection. It enables them to scrutinise their liquidity
providers and partners’ processes against best practice, ensuring they achieve
best execution and get the transparency they deserve.

Renewing
commitments to the code

In July
2021, the GFXC published the updated version of the code following an extensive
process of consultation with the foreign exchange committees around the world
and a public request for feedback in April of the same year.

Guy Debelle, GFXC’s then chair, said: “The changes to the Code will ensure
that the Code continues to promote the integrity of the market. Many of the
changes are designed to bring about greater transparency in an increasingly
complex market.”

The GFXC
acknowledged that these changes would affect certain parts of the market more
than others and said it anticipated that it would take around 12 months for
practices to be brought into alignment with updated principles. And, this year,
we have started to see some institutions, including the Bank of England, renew
their commitment to the new code which is positive.

What I
would like to see is the GFXC requiring all signatories to review and renew
their commitments to the updated FX Global Code, whether they’re affected by
the new changes or not.

Many
signed up five years ago and so much has changed in that time with the advent
of remote working, adoption of new technology and the great resignation which
saw many change jobs.

A formal
renewal process would help ensure that all signatories remain compliant and
committed to the code and its principles.

Focusing
on smaller market participants

The FX
Global Code has been welcomed by the FX community and provided a forum for
participants to debate a range of issues, from algorithmic trading to last look
and TCA.

That said,
it’s important we don’t rest on our laurels and see 1,100+ signatories as
enough. We need to focus on the smaller market participants (e.g. buy-side and
corporates) as together they make up a significant portion of the market. These
are the firms which benefit most from the best practice set out in the code
and, as an industry, we need to make sure we bring them on this journey with
us.

In
summary, we believe the FX Global Code should be for the whole FX market, not
just for the wholesale FX market. There’s still more to do to get there.