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Buy-side adoption of the FX Global Code

FX Global Code looks to attract buy-side following

The FX Global Code (FXGC) was introduced in May 2017 to establish industry-wide best practice on dealings in the USD 5 trillion FX market. While hundreds of sell-side firms, including the world's top 30 investment banks, have accepted the 55 principles of the code, the industry's buy-side has been less responsive. Proponents are looking to address this imbalance through a targeted campaign to promote the strengths and benefits of the Code.

“The FXGC clearly sets out the execution, risk management, and information-sharing procedures that are expected from those working in the world's largest financial markets," said Aidan Mittra, Head of RBC's Global Custody FX business and FX Trading in Canada. “Ethics and governance are earmarked as significant standards to uphold, and are a thread running through the rest of the Code."

After listening to both public and private sector advice and demands, the final product met with little resistance from the sell-side. Realizing the vast range of institutions that work within FX markets, the Bank of International Settlements, which coordinated the initiative, has also provided some flexibility by allowing market participants to implement and absorb the Code into the relevant parts of the business in a time frame that fits best within their own discrete structure.

Key insights

  • Despite extensive sell-side support for an industry-wide code of conduct, some fund managers remain reluctant to engage with the initiative, which could jeopardize its success
  • Proponents are looking for opportunities to influence and encourage acceptance from buy-side participants to promote resilient and transparent global FX markets

Low buy-side adoption a challenge for the Code's coordinators

Irrespective of these allowances and the clear intentions for the initiative, only a third of the world's top 30 buy-side firms have so far signed up to the Code, according to the Bank of England. There are even fewer signatories among their smaller peers.

In December 2018, Andrew Hauser, Executive Director for Markets at the Bank of England, spoke of the success the FXGC had achieved in signing up more than 600 financial institutions.

The collaborative efforts from regulators and market participants around the world had created a “simple and powerful ‘off the shelf’ way to educate and promulgate globally recognized best practice," he said.

“An update to the Code in 2018, and a promise to keep it evolving to reflect changes and shifts in the market,” has been welcomed by investment and custodian banks, brokers, and trading platforms,” Hauser said. The challenge from the buy-side remains.

The FXGC clearly sets out the execution, risk management, and information-sharing procedures that are expected from those working in the world's largest financial markets

Hauser said despite the Code not being signed into law, some buy-side firms deemed it to be a layer of regulation that did not apply to them. Some were also concerned at the potential cost implications of implementing the Code's requirements at a time when the fund management sector is being squeezed on margins from all sides, and the time it would take when compliance teams were grappling with other regulatory obligations.

Buy-side buy-in can boost the impact of the Code

The industry needs to look to the future as a unified collective and take a collaborative approach to establishing and maintaining standards that can reaffirm its standing in the eyes of the public and investors it serves, argue the BIS and FXGC committees.

“By signing up to the Code, a fund manager is indicating the standards it expects from a trading partner and that it would be prepared to hold them to account," said Mittra.

“Although not as strong as imposing regulation, the focus on ethics and governance is in line with efforts from central banks and other financial institutions dedicated to improving world markets."

Non-participation could provide to be a competitive disadvantage. In a survey of signatories in late 2017, a significant number said they would be either scaling down or ceasing to trade with partners that declined to sign up.

Winning buy-side support

The industry needs to take a collaborative approach to establishing and maintaining standards

With these developments in mind, the Code's governing committee has created a group that will reach out to buy-side firms to explain the benefits of joining their sell-side partners in signing up to the Code. The ongoing evolution of the Code will need to be shaped by partners on both sides of the equation if it is to remain fit-for-purpose.

“We must all be responsible for our actions and ensure others play by the rules," said Mittra.

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  1. Global Foreign Exchange Committee (May 25, 2017) Global code of conduct sets out good foreign exchange market practice
  2. Global Foreign Exchange Committee (August 2018) FX Global Code
  3. Bank of International Settlements (May 2017) Report on adherence to the FX Global Code
  4. Global Foreign Exchange Committee (December 19, 2017) GFXC Survey Results
  5. Global Foreign Exchange Committee – Global Index of Public Registers
  6. Financial Conduct Authority (November 8, 2016) FCA fines five banks £1.1 billion for FX failings and announces industry-wide remediation programme
  7. Reuters (November 7, 2018) Big investors sue 16 banks in U.S. over currency market rigging