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First Phase of FX Global Code of Conduct Released by Bank for International Settlements
Practical Law Legal Update w-002-5361 (Approx. 3 pages)
First Phase of FX Global Code of Conduct Released by Bank for International Settlements
by Practical Law Finance
| Published on 01 Jun 2016 • USA (National/Federal) |
The Foreign Exchange Working Group (FXWG), operating under the Markets Committee of the Bank for International Settlements (BIS), released the first phase of a Global Code of Conduct for the foreign exchange (FX) market and associated principles for adherence to the new standards.
On May 26, 2016, the Foreign Exchange Working Group (FXWG), operating under the Markets Committee of the Bank for International Settlements (BIS), released the first phase of the Global Code of Conduct for the Foreign Exchange Market (Global Code) and the associated principles for adherence to the new standards.
The Global Code was conceived in response to misconduct in the foreign exchange (FX) markets. The Code is intended to restore trust in the FX market and to promote a robust, fair, liquid, open, and transparent market. The FXWG is composed of major central banks (including the Federal Reserve Bank of New York, the European Central Bank, and the Bank of England, among others) in both advanced and emerging market economies and is supported by the private sector through the Market Participants Group, formed by the FXWG.
The Global Code does not impose legal or regulatory requirements on any party, and instead sets out global good practices and processes that are intended to supplement local regulations. The Global Code applies to all market participants, including entities or persons that are:
- Are active in the FX markets.
- Operate a facility, system, or platform that provides FX execution services.
- Allow other market participants to execute FX transactions.
Market participants do not include the general retail public or banking customers that trade as individuals or through personal investment vehicles.
The six leading principles included in the first phase of the Global Code are:
- Ethics. Market participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX market. They should act honestly, fairly, and with integrity when dealing with customers or other market participants. Additionally, market participants should have sufficient knowledge of applicable law, sufficient experience (and technical qualifications) to engage in the particular matters upon which they work, and should act with competence and skill in applying their professional judgment and their firm's operating procedures.
- Governance. Market participants are expected to have robust and clear policies, procedures, and organizational structures in place to promote responsible engagement in the FX market. Additionally points on this principle are forthcoming in May 2017 in the next phase of the Global Code.
- Information sharing. Market participants are expected to promote effective communication that supports a robust, fair, open, liquid, and appropriately transparent FX market. Communications between market participants should be carried out over approved modes and channels, and in a way that is honest, not misleading, and that correctly attributes information from third parties. Maintenance of confidential information is especially important, and details of a market participant's order book, spread matrices, and orders for benchmark fixes should be stored accordingly.
- Execution. Market participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent FX market. Additionally, they should understand and communicate their roles clearly in managing orders and executing transactions, and should handle client orders fairly and with transparency, including by, among other things:
- clarifying whether offers and prices are firm or merely indicative;
- having processes in place that support rejection of orders that are not suitable for clients;
- informing clients whether discretion exists for the order; and
- making clients aware of execution specifics, such as whether orders are aggregated or time prioritized, whether orders are processed manually or electronically, and other factors that could affect execution (including positioning, assumption of associated risks, and the status of prevailing market conditions, such as liquidity).
- Additionally, market participants should be aware that different order types may require consideration of different factors.
- Risk management and compliance. Market participants are expected to promote and maintain a robust control and compliance environment to effectively identify, measure, monitor, manage, and report on the risks associated with their engagement in the FX market. Additional points on this principle are forthcoming in the next phase of the Global Code.
- Confirmation and settlement processes. Market participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX market. Market participants should establish consistency between operating practices, documentation and polices for managing credit and legal risk, and should take into account their ability to manage capacity in both normal and peak trading times. Market participants should confirm trades (and resolve confirmation and settlement discrepancies) and allocate block trades as soon as practicable. Market participants are encouraged to monitor and mitigate their settlement risk. Market participants should take care to engage in transaction reconciliation to reconcile expected cash flows against actual cash flows on a timely basis.
The complete Global Code and adherence mechanisms will be released in May 2017.