Prior to the financial crisis, conduct was not generally considered to be critically important. Regulators largely supported a ‘light touch’ approach resulting in widespread lapses in judgement and ethics and a series of scandals. The FX Code of Conduct, based on principles, not detailed rules, sets out to permanently raise FX conduct standards, so why should you sign up?

Frances Hinden

VP Treasury Operations, Shell International Ltd

Neill Penney

MD & Co-head, Trading

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Whilst many participants in the foreign exchange markets had either commenced their summer vacations, or were certainly preparing to do so, almost 200 people joined a most informative webinar on 1st August to learn more about the new code.

The code is not just about the sell-side, nor is it about past misdeeds. As Neill Penney, MD & Co-head, Trading at Thomson Reuters highlighted, it is about building a better future for the FX markets and comprises 55 principles designed around the following six key pillars:

• Ethics
• Execution
• Governance
• Risk management and compliance
• Information sharing
• Confirmation and settlement processes

Download the code: www.globalfxc.org/docs/fx_global.pdf

Whilst voluntary, the new code, introduced just over a year ago, now has over 300 market organisations, mainly banks, having signed public statements of commitment. The code is already impacting market practices across the industry. Corporates are now engaging with the code too, as demonstrated by the growing (albeit slowly) number (including Shell) indicating their adherence to the code.

As Frances Hinden, VP Treasury Operations at Shell International Ltd stated, “Some of the code (credit risk, controls) is a good guide to how you should run an FX dealing desk and a valuable checklist. It also emphasises the importance of understanding the relationship with your banks and being clear what you expect – there’s a lot of jargon in the code but using it properly can be vital in getting the service you want. For example, being clear on the difference between agent and principal or understanding how ‘risk transfer’ or ‘pre-hedging’ affect the price you get. You should ask yourself, not “why should I sign?” but “why shouldn’t I sign?”

This is about two groups putting aside current frustrations and low trust to embark on a better future for the FX industry. The code could extend into other financial markets such as fixed income. A term frequently used when describing the code is ‘proportionality’, which means the code shrinks in complexity the simpler treasury operation you have, the number of trades you execute and so on.

It is generally accepted that good quality markets don’t just happen, so the new code sets out to encourage a well-conducted, fair, transparent and effective FX environment. Further, public adherence to the code sends a strong signal to your counterparties. Frances says Shell have taken the step to write to all the banks with which it trades FX to inform them that, unless those banks commit to the code by January 2019, they will be removed from Shell’s panel of FX counterparty banks.

Neill concluded: “Memories of the financial crisis will fade. After all, today’s 21 year olds were just ten years old when Northern Rock collapsed. That’s why it’s so important for the industry to work together now to ensure that standards are changed permanently.”

Neill also advised that over 10,000 comments were initially received on the code and, whilst not all were incorporated, all were read. Almost 70% of our audience felt it is important that the corporate treasury community is seen to publicly support the code through adherence.

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Please note that this webinar is hosted on the Thomson Reuters platform. If you wish to watch this webinar you will be directed to the Thomson Reuters website.