Launched in 2017, the FX Global Code of Conduct is a voluntary set of principles designed to promote fairness, transparency, liquidity and openness across the global FX market. Vincenzo Dimase, Market Development Manager, FX – Europe at Refinitiv (the financial and risk business of Thomson Reuters is now Refinitiv) explains what the Code means for corporate treasurers and their counterparties and why treasurers should sign up.

Recent years have seen many regulatory changes in the world of FX. But while robust regulation is important, following the letter of the law can have its limits. Market participants around the world have increasingly felt that a code of conduct is needed to maintain fair and effective markets, while avoiding any repeat of the scandals of the past.

As a result, market participants worked together for two years to build a global code of conduct which would focus on voluntary principles rather than rules, and which would promote considered reflection rather than simply checkbox compliance. The result of this exercise was the FX Global Code. Published in 2017, the Code consists of 55 principles intended to promote transparency, fairness and integrity within the wholesale FX market. The Code is designed for a diverse range of buy-side and sell-side market participants, including banks, central banks, asset managers, non-bank liquidity providers, brokers, e-trading platforms and corporate treasuries.

Refinitiv has played an active role in developing the Code through our membership of the Market Participants Group (MPG), as well as several regional committees. We wanted to make sure that our platform would embed the rules, concepts and principles of the Code. We formally signed a statement of commitment in November 2017.

About the Code

The Code was written with a number of objectives in mind. The overriding goal was to create a document that would be as useful and usable as possible. Unlike financial regulation – MiFID II runs to 7,000 pages by one count – the FX Global Code of Conduct is a digestible 78 pages and is written in plain English. Much effort has been made to ensure the code is both user friendly and relevant, and that it includes concrete examples demonstrating how the principles can be employed in practice.

Another key characteristic of the Code is that of proportionality. This means that market participants can adopt the Code according to the complexity of their operations and their level of engagement in the FX market. So a small bank will not be expected to achieve the same type of implementation as a large bank. Likewise, the steps involved in adopting the code will look different for corporates than for banks. The Code is also designed to evolve in line with technological developments in the market.

Gaining momentum

Banks have been proactive in signing up: to date over 300 market participants have agreed to adhere to the Code. But the picture is somewhat different for buy-side participants. At the time of writing, corporates represented only 2-3% of the parties who have signed up, with early corporate participants including Shell, Airbus and Siemens.

This is likely to change as awareness grows. Corporates may have seen the Code as a matter for banks. But in practice, the global FX ecosystem is very diverse, incorporating a wide range of market participants. In order to be as relevant as possible, the Code needs to be adopted across the entire ecosystem.

Fortunately, interest in this topic is growing. During a recent webinar by Refinitiv and Treasury Today, a poll found that two thirds of attendees felt it was important that the corporate treasury community publicly support the Code. An important step in achieving this was the recent launch of a register of corporates adhering to the code by the European Association of Corporate Treasurers (EACT), alongside existing registers.

What should you be doing now?

Signing up to the Code is straightforward. Treasurers wishing to adopt the code should:

• Read the Code and try to isolate the areas which are most relevant to their businesses. This might prompt the company to assess its liquidity providers, or request prices from more than one counterparty, or begin using an electronic platform instead of the phone.
• Inform the relevant people. This may involve working with external parties – associations such as the EACT are offering learning courses which can provide a learning path for the relevant people.
• Fill out the statement of adherence – a straightforward document – and send it to the public register.

The company will then be listed as adhering to the Code and will appear on the public register. Being part of that list – and particularly one of the early adopters – tells the market something about the company’s values and how the company approaches FX.

Why sign up?

For corporates, the Code has much to offer. Companies which sign up to the Code are sending a clear message to the market: they are aware of the key principles of the Code; they may have adjusted their internal processes; they understand the transparency and fairness that banks need to adopt when dealing with counterparties. The following are some of the areas where benefits can be seen:

• Market colour.The Code provides clear guidelines about how participants can provide ‘market colour’ – in other words, how they should respond when clients ask for insights into how markets are performing. In such cases, the Code stipulates that communications “should be restricted to information that is effectively aggregated and anonymised”. If corporates have a clear understanding of how counterparties are required to reply to these types of questions under the Code, they may well ask different types of questions – so the Code can play a role in reducing the risks for both parties.
• Execution.Where execution is concerned, the Code also stipulates that market participants acting as clients should exercise a good level of scrutiny when evaluating the types of service offered by their liquidity providers. This may mean putting in place suitable analysis tools and being aware of providers’ responsibilities. The Code likewise encourages a high level of STP and may prompt participants to move from manual to electronic methods.
• Transparency.We believe that greater awareness among all market participants will raise transparency on both sides of the market. Supporting higher levels of visibility, Refinitiv has recently launched Trade Performance Analytics for FXall users, which enables FX traders to evaluate the quality of their trade execution and understand how their liquidity providers are performing.

Alongside these benefits, it is likely that corporates will increasingly pay attention to whether their counterparties have signed up to the Code, and may ultimately begin selecting liquidity providers on this basis. A bank which has adhered to the Code has signalled that they are actively working to adopt these principles and avoid reputational risks. The steps they have taken will include educating their people about the principles and adjusting their back office procedures to reduce operational errors.

Getting started

For corporates, it’s important to understand that signing up to the Code is not expected to involve significant changes. The main focus is on having the tools and awareness needed to adopt the principles, rather than reinventing procedures or transforming infrastructures.

What could this mean in practice? Corporates signing up to the Code may wish to consider moving from manual to electronic trading methods, or moving from a bilateral to a more competitive multilateral approach. They may also wish to review some of the technology in place, albeit to a lesser extent than banks.

As part of this process, treasurers may wish to purchase a system that allows them to judge the quality of the service they are receiving – which is good practice in any case. Above all, the goal is to digest the principles, provide the relevant knowledge to people in the treasury department, inform counterparties that they are aware of the Code – and raise the bar when it comes to best execution.

Conclusion

The Code offers a welcome opportunity to promote good conduct in the global FX market. It is worth noting that this is not an isolated development: last year also saw the launch of the Global Precious Metals Code and the UK Money Markets Code. Going forward, it is likely that the world of FX – and the wider banking landscape – will continue to place greater importance on conduct.

In conclusion, we believe that the Code has an important role to play in driving a fairer market. While rules can quickly be superseded, principles are less likely to become obsolete or be circumvented. By having a common understanding of good practices, we can build a more transparent industry which can benefit everyone.