In a session held at last year’s Sibos, a wide-ranging discussion focused on the FX Global Code and its implications for technology, the buy-side and correspondent banking.
The product of an ethical crisis
The Global FX Code was conceived in 2015, in the aftermath of a series of fines levied on major banks for manipulating the foreign exchange markets. The central banks were concerned about the declining level of public trust in the workings of the foreign exchange markets.
The FX industry was suffering a large reputational issue
“That started to have a detrimental impact on the functioning of the market. We as central banks could see that increased dysfunction at first hand, because we were in the market every day ourselves. Plus, we care about the exchange rate. It is an important part of monetary policy transmission. Something needed to be done.”
Providing a global standard
Published in May 2017, the FX Global Code contains 55 principles of good practice. “Most of the stuff is common sense,” says Debelle. “One part of that common sense is, `Treat your counterpart well, rather than rip them off.’ That is a theme which underpins a lot of it. The principles are all written in pretty straightforward English, so they are easily understood, both by your average FX trader and also people from the back office.” The Code includes illustrated practical examples to bring each principle to life and indicate exactly how participants should behave in particular situations.
Debelle recalls that in 2015 there was widespread agreement on the need for the behaviour of participants in the FX market to improve, but no consensus on what good practice might actually look like. “So it was extremely useful to get out there something which said, `This is what we think constitutes good practice,’ so there would be an agreed standard on that,” explains Debelle. “There had been codes of conduct in all the major FX centres for a number of years. Clearly, they had not been followed, so we needed also to come up with a way of getting people to follow it.”
Public registers help to ensure the Code is adopted and implemented
“The information as to who has signed up to the Code is out there,” as Debelle puts it. “If you were getting ripped off by one counterpart going back a few years and you said, `I am going to take my business down the road’ to someone else, that was not really a particularly credible threat, because there was a fair chance you were going to get ripped off to pretty much the same degree by them, whereas now that is a credible threat.”
The Global Foreign Exchange Committee (GXFC) publishes a Global Index of Public Registers which brings together all entries on the 13 public registers listing those firms who have issued a Statement of Compliance to the Code. Potentially there could even be a register for correspondent banking and payments divisions. Debelle was supportive to the idea that this could be a role for SWIFT, “SWIFT has a network effect. I can see them being a platform for a global registry for correspondent banking and payments divisions.”
The fact the central banks now require all their counterparts to sign the Global FX Code is a case in point. “We will not deal with counterparts who have not,” says Debelle.
Fred DiCocco, Global Head of Treasury Services at BNY Mellon, says the bank has told its counterparts it expects them to sign the Code but has not made it compulsory. “We are starting to deal with counterparts, on a case-by-case basis, that have not signed,” he says. In making those case-by-case judgments, banks such as BNY Mellon will take a range of factors into account before deciding not to work with non-signatories. Those factors include the value of the FX business of the client, the overall value of the relationship and whether the client has pursued good or bad practices in the past.
How disruptive do we want to be to that relationship in enforcing the Code?
This is one reason why Guy Debelle thinks FX platforms can be a more powerful instrument of adoption of the Code than the banks, by turning away liquidity providers that are reluctant to support the Code. He nevertheless accepts that the range of businesses covered by a signature in any of the 13 registers will vary from institution to institution, with some signing on behalf of the entire firm and others on behalf of a part of it only.
Implications for Correspondent Banking
The view of Fred DiCocco is that the BNY Mellon’s correspondent banking business is not covered by the signed statement of commitment by the bank to the FX Global Code. “I would say we signed it only in the context of our FX trading business,” says DiCocco. “With our focus particularly on trying to mitigate manipulation risk, and on enforcing standards and practices amongst the FX staff, I would say it does not blanket over to the payments business. Our attestation is global in nature, in terms of all of our trading desks globally, but it is limited to our markets activity.”
He also points out that, although correspondent banking networks are major conduits for the settlement of retail FX transactions, the FX Global Code does not even apply to retail transactions, since it addresses wholesale FX only – on grounds the regulation of retail FX is too varied to support a single set of principles.
However, DiCocco does agree that the Code “talks to” FX payment practices such as auto-conversion – namely, using a preferred correspondent bank to convert currency without an explicit instruction from the ordering customer – and believes such practices should be “put into a code or policy or governed in a different way.”
“Are all 55 tenets of the Code relevant?” asks DiCocco. “Absolutely not. Things around pricing disclosures, avoiding things around `last look,’ to manipulate the price, things of that nature – they are what rise to the top of the agenda for us. If you are involved purely in the settlement part of the business, then only the settlement part of the business is going to be relevant,” he says. “The rest of it is just there for your information.”
Embedding principles into daily activities
However, Debelle expects local regulators to ensure any signatory puts in place measures and processes to ensure the commitment becomes a day-to-day reality in those parts of their FX business which are affected by the Code. “People often say codes of conduct are worth not much more than the paper they are written on,” says Debelle. “So it is important people do not just pay it lip service.”
Indeed, Principle 5 of the Code insists signatories “embed” principles of good practice in their day-to-day activities in the FX markets. That means ensuring employees understand the Code and operate to its precepts, through training and re-training courses. “Setting standards to ensure the integrity of the market and the confidence of the participants is absolutely critical,” agrees DiCocco. “What we have done is focus on mitigating market manipulation risk in our FX processes and operations.” BNY Mellon staff are expected to attest they have read and understood the Code.
There is an expectation that firms will re-attest every year. “I would expect most people would have the relevant staff doing the same, i.e re-attesting,” says Debelle. “Have the training annually. Re-attest each year. The Code is a living document. It is going to change. It is not changing in any wholesale fashion, but it will change. There are some issues which are in a state of flux in the markets, some new issues surfacing, and the Code will adapt to reflect them, so at the very least your training would need to stay current with that.”
Demonstrating commitment to the Code mitigates compliance risk
The Code completes the work begun by the fines levied on banks in 2015, by finally demolishing the notion that ignorance of good practice will provide any kind of defence against allegations of malpractice. “It will be willful neglect this time around,” says Debelle.
He adds that the Australian Securities and Investments Commission (ASIC) is using the FX Global Code in its market surveillance activities. In the United Kingdom, the Financial Conduct Authority (FCA) has gone further. It has made adherence to the 55 principles part of the Senior Managers and Certification Regime introduced in March 2016. This makes individual managers accountable for what happens within their firms. “With the senior managers regime, the accountability is both individual and corporate,” warns Debelle.
FX Global Code also applies to the buy-side
“While most of the malpractice to date, that we know about, was on the sell-side, this is not a code of conduct for the sell-side, and nor was it developed by the sell-side,” says Debelle. “This code of conduct was a joint public-private exercise. On the private side, there was the sell-side but there was also the buy-side, platforms, corporates, the full spectrum of the market. It was something we were able to get agreement on across all segments of the market. It was not, `The sell-side stuffed up, so you are going to write the code of conduct to say how they should behave.’ That is not the way it was.”
Debelle adds that he expects even a firm that engages in FX trades irregularly, and indirectly, should still use the Code as the standard by which to judge the behaviour of its counterparts - even if it does not actually sign the Code itself. “I would not expect you to sign the Code,” says Debelle. “If you are very much on the receiving end, then the Code is more about giving you an idea of how you should expect to be treated in the market. The other thing it does provide you with is the sort of things you should not ask your counterparty to do on your behalf.”
The FX Global Code applies to software as well as human beings
Debelle makes clear that blaming technology will never be seen by regulators as a valid excuse. “We are pretty clear on that,” he says. “If you are putting an algo into the market, it is your responsibility. There is no two ways about that. You have got individual responsibility. If it is the e-trading business, or whatever, that person who is head of that organisation has absolutely got the personal responsibility.”
Fred DiCocco is alert to this risk. He argues that the FX Global Code effectively obliges buyers of technology applications to build the Code into their management of technology vendors, to make sure the systems they use do not violate any of the 55 principles. “We are ensuring that we are doing the right due diligence to ensure that we know what we are buying,” he says. “Not only before the fact, but after we implement, by putting the right risk and governance controls in place to monitor the process on that platform throughout its cycle.”
The Code needs to evolve
The evolving nature of these technology risks is a reminder that the FX Global Code cannot remain static. It is a perpetual work-in-progress, in which some principles will matter more at some times than others, and in which new issues will prompt amendment or even replacement of principles. In fact, the GFXC exists to ensure that the Code keeps abreast of developments in the FX markets as well as monitoring adoption and implementation.
“We have got to make sure the Code stays current but, at the same time, we cannot be re-writing the thing, holus bolus, every couple of years,” says Debelle. “That would defeat the purpose. So it is evolutionary.” And he is clear about the implications if the Code fails to evolve. “The FX market is not an exchange-traded market, and I think there was a serious risk of exchange-type regulation being foisted on it in a way which would absolutely have been detrimental to the market functioning.”