Treasury Today Country Profiles in association with Citi

Cracking the new foreign exchange code

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Have you heard about the new foreign exchange code of conduct? Treasury Today tells you all you need to know.

Last month, we wrote a Treasury Insights article on improved FX decision-making and the renewed interest in measuring, and thus managing, the effectiveness of FX trading activity.

Transaction cost analysis (TCA) was cited as being one of the most effective tools to do this. A solution offered by the large majority of dealer platforms and various other firms, TCA utilises a set of data and tools used to define, track and enable corporates to take the first steps toward establishing best practices for transacting in the currency market.

In the article, we suggested now might be a better time than any to take a renewed look at TCA, as best execution is set to come under the spotlight with the introduction of the new global code of conduct for foreign exchange. This was a view reinforced by Neill Penney, Managing Director, Trading at Thomson Reuters during a recent webinar hosted by Treasury Today.

Code of conduct

Published by The Bank for International Settlements (BIS) Foreign Exchange Working Group (FXWG), the code of conduct identifies global best practices and processes that aim to inform corporate practice and assist in developing and reviewing internal procedures.

Market participants, including corporate treasury departments, or corporate treasury centres entering into external (non-group) transactions either on its own account or on behalf of the parent companies, subsidiaries, branches, affiliates or joint ventures of the group it represents, are covered by the code.

Its aim is to bring confidence and transparency back to the foreign exchange markets. The move will, of course, mean changes to the FX industry that will have an acute impact on how banks and corporate treasury departments interact.

Final publication of the complete FX Global Code is targeted for May 2017.

What does the new code cover?

The Global Code is organised around six key pillars with respective leading principles as follows:

  • Ethics:

    Market participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX market.

  • Governance:

    Market participants are expected to have robust and clear policies, procedures, and organisational structure in place to promote responsible engagement in the FX market1.

  • Information sharing:

    Market participants are expected to be clear and accurate in their communications and to protect confidential information to promote effective communication that supports a robust, fair, open, liquid and appropriately transparent FX market.

  • 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.

  • 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.1

  • 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.

  1. These sections are in development as content to be published May 2017 as part of phase two of this work.

Market colour

The code has attempted to offer some examples of appropriate and, indeed, inappropriate communication on market colour (a view shared by market participants on the general state of, and trends in, the market), as follows:

Deemed appropriate:

Bank salesperson to hedge fund: “We saw large USD/KRW demand from Real Money names this morning.”

Asset manager to bank market maker: “Can you give me some colour around the 100 point rally in GBP/USD in the past hour?”

Broker to bank market maker: “We’ve seen strong demand for one-month at-the-money USD/JPY volatility from European banks this morning.”

Corporate to bank market maker: “What is liquidity like in EUR/USD at the moment in terms of market depth for €50m, 100m or 200m?”

Deemed inappropriate:

Bank salesperson to hedge fund: “We’ve just seen large USD/KRW demand from XYZ (where ‘XYZ’ is a code name for a specific client).”

Asset manager to bank market maker: “I hear that you’ve been a big buyer of GBP/USD. It is for the same UK corporate again?”

Broker to bank market maker: “European banks are currently bidding for one-month at-the-money USD/JPY volatility in size.”

Corporate to bank market maker: “If you sold 500m EUR/USD for me now, how much do you think you could move the rate?”

Watching brief

During the recent webinar, Treasury Today polled those in attendance to seek their views on the code. Seventy nine percent said they believe it is important that the corporate treasury community is seen to publicly support the code through adherence. There was also faith that the banks would adhere to the code, with 91% of those polled expecting them to be adherent.

Do you feel it’s important that the corporate treasury community is seen to publicly support the code through adherence?
Do you feel it’s important that the corporate treasury community is seen to publicly support the code through adherence?
Will you expect your banks to be adherent to the code?
Will you expect your banks to be adherent to the code?

In conclusion, this is very much a watching brief at the moment but as the final Code of Conduct is scheduled to be published in May, it may be worth familiarising yourself with the key components. It may also be appropriate to update your treasury policy and procedures manual to reflect the requirements of the new code.

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