Thank you, Colin, for the introduction.
As you know, trading in the FX market follows the sun. And today, so does the launch of the FX Global Code. This morning, London time, marked the official launch of the Code and the Global Foreign Exchange Committee (GFXC), a group that will maintain the Code over time. My colleague, Simon Potter, the head of our Markets Group at the New York Fed, was the leader of the workstream charged with developing the Code text. He is participating in launch events there in London, together with the two other central bank project leads, Guy Debelle of the Reserve Bank of Australia and Chris Salmon of the Bank of England, as well as David Puth of CLS, the chair of the Market Participants Group for the project, and other contributors from the public and private sectors. Now, here in New York, I am pleased to continue the launch on this side of the Atlantic.
In May 2015, central bank governors from around the world challenged staffs from a group of central banks “to strengthen code of conduct standards and principles in foreign exchange markets . . . by facilitating the establishment of a single global code of conduct standards and principles [and] promoting greater adherence to these standards and principles . . . .”2 The publication of the Code is an important milestone for both those central banks and members of the private sector who have invested considerable time and effort into its development over the past two years.
Today, I would like share with you how staff from central banks took on the governors’ challenge, and in turn challenged the industry to think critically about conduct in the wholesale FX market, restore trust in an FX market marred by misconduct, and affirm practices “intended to promote a robust, fair, liquid, open, and appropriately transparent market.”3 I will also share some observations on how the challenge continues, which hopefully will set the stage for the panel discussion to follow.
Before continuing, however, I would like to note that the views expressed today are my own, and do not represent those of the Federal Reserve Bank of New York or the Federal Reserve System.
Development of the FX Global Code
The formal call to create the Code came from the central bank governors in May 2015, but the beginnings of the Code can be traced to best practices that have long existed in the wholesale FX space. Foreign exchange committees (FXCs) sponsored by central banks, such as the FXC sponsored by the New York Fed, have produced best practice recommendations for decades. Generally composed of private sector market participants, these committees advise central banks on developments in the FX markets and engage on matters regarding the effective functioning of the market. As is probably obvious to people here, central banks have a strong interest in the fair and effective functioning of the FX market. Collaboration among the FXCs from various regions has increased over the years, and that collaboration has resulted in global work product, such as the 2015 “Global Preamble.”4
The May 2015 call by central bank governors for a single, global set of best practices presented a new opportunity. Although no voluntary Code, and in fact not even law or regulation, can or will guarantee that a financial market as big and varied as FX will proceed without events that reflect poorly on market participants, the call to develop the Code was a chance to articulate principles that will hopefully make those events rarer.
As my colleague Simon Potter, the head of our Markets Group, has pointed out, best practices “can identify risks, solve ‘first-mover’ problems, challenge long-established practices, improve market function, and assist control functions.”5 They hold opportunity, in that they represent a mechanism for market participants to articulate and embrace better standards of behavior for themselves. But the realization of that opportunity depends upon the will of market participants to engage and implement changes that are appropriate for their businesses.
As a single, global code, the Code has been drafted to be applicable to market participants from across the wholesale FX market: the “buy side,” including corporates and asset managers; the “sell side”; and trading platforms, ECNs, and non-bank participants. A Code applicable to a broad array of market participants requires input from a broad array of market participants.
That imperative to seek broad input is both a challenge and an attribute of the Code. It has certainly been a logistical challenge, one that has involved staff from over a dozen central banks; the membership of various regional FXCs sponsored by central banks; a private sector Market Participants Group;6 contact with other central banks and official sector entities interested in good market conduct; and outreach to many industry groups and other stakeholders.
But, as I noted, it has been an attribute as well as a challenge. It has required market participants to think critically about their individual roles in the market and about what practices will support the Code’s goals. It has also encouraged them to debate issues and work to articulate principles in plain language that market participants can easily read and understand, and which affirm standards applicable across the many places and ways in which FX is transacted.
The collaborative process has resulted in 55 principles in the areas of ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement. The first phase of the Code, released in May of last year, addressed principles on ethics, information sharing, confirmation and settlement, and certain execution topics. The second phase, being released today as part of the final Code, focuses on principles for governance, risk management and compliance, and further aspects of execution, including e-trading, trading on venues, and prime brokerage. Also, published alongside the full Code text is a set of illustrative examples, the aim of which is to provide additional color regarding certain of the principles.
As I mentioned, the Code is written as principles. The reasons for this are twofold. First, the Code is not regulation. The text is quite clear about the status of the Code as a set of good practice recommendations, a document that is not intended to supplant or modify applicable law or to act as a safe harbor for behavior that contravenes applicable law. In doing so, it recognizes the importance of compliance with the law and the role of authorities in enforcing the law.
Second, the focus on principles encourages each market participant to think about how concepts from the Code translate to its activities. In implementing the Code, it is incumbent upon wholesale market participants to think about whether their activities are consistent with the Code and how they can use the Code as a benchmark for their internal procedures and control functions.
Perhaps no topic is more illustrative of the challenge of producing the Code than last look. Broadly speaking, last look is described by the Code as “a practice utilised in Electronic Trading Activities whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price.”7 It is a topic that generates debate, both with respect to whether last look is an appropriate practice at all and with respect to specific practices surrounding the use of last look. It is, thus, no surprise that the central banks and private sector participants involved in drafting and providing feedback on the Code engaged in considerable discussion regarding last look.
These discussions were useful to advancing the understanding of a relatively new form of execution. They helped identify issues that are central to the Code’s mission of fostering an FX market in which market participants are able to confidently and effectively transact at competitive prices that reflect available information and in a manner that conforms to acceptable standards of behavior.
One such issue was that of engaging in trading activity during the last look window that uses information from a client’s request to trade. The Code text provides that such trading activity is “likely inconsistent with good market practice because it may signal to other Market Participants the Client’s trading intent, skewing market prices against the Client . . . .” This text recognizes input that expressed concern that hedging activity during the last look window could be to a client’s detriment.
Last look is obviously a topic of great interest, and it exists in the rapidly evolving electronic trading space. I will go into additional detail in a few moments on what will be done to maintain the Code as a relevant document, with respect to last look and the Code’s 54 other principles.
Before I get to the future of the Code text, however, I would like to address the second part of the challenge set by the central bank governors in May 2015: encouraging widespread adoption of a voluntary Code.
Alongside the publication of the Code today, the central bank staffs involved in the Code process have also published a document outlining the approach to adherence.8 Broadly speaking, the work of the central bank staffs has focused on four core aspects to encouraging widespread adoption of what is, essentially, a voluntary code.
First, the Code itself should be high quality. It should be clear and relevant and reflect good practice. In other words, market participants should want to use the Code as a benchmarking tool. While this might seem like an obvious point, it is a foundational one.
Second, market participants have a role to play in encouraging widespread use of the Code. Market participants must know about the Code. In that regard, both official sector and private sector stakeholders have contacted more than 120 industry associations and key market infrastructure providers globally. Market participants can also be public about their support for the Code if they so choose. An annex to the Code provides a model “Statement of Commitment”—a statement that market participants can use on a voluntary basis to express their commitment to conduct their wholesale FX activity in a manner consistent with the Code’s principles.
Third, central banks have an interest in the Code and in fair and effective FX markets. Central banks act as market participants and the FX market plays an important role in the implementation of monetary policy in many countries.9 The central bank governors who challenged their staff and the industry to create the Code have affirmed through a statement, published today, that their institutions intend to adopt the Code when they act as market participants, except where doing so would inhibit the discharge of their legal duties or policy functions. Through the same statement, they have stated that they will expect their institutions’ regular FX trading counterparties to adhere to the Code, so that central banks can have confidence that their counterparties adhere to the high standards of ethics and behavior.
As I mentioned earlier, certain central banks also sponsor FXCs. FXCs from important financial centers across the globe, through the GFXC, have expressed their support for the publication of the Code. In addition, certain central banks (such as the New York Fed with respect to the New York FXC), or the FXCs they sponsor, have determined to link membership on their committees with adherence to the Code.
Finally, the official and private sector participants in the Code process, having addressed the initial challenges set by the central bank governors, must be prepared for the challenge ahead. They must maintain active engagement with the Code and have a means to keep it relevant.
The Code Going Forward
As I noted toward the beginning of my remarks, the Code has its roots in regular, but informal, contact between regional FXCs. Moving forward, the Code will be maintained by a more formal GFXC, the creation of which was announced earlier this morning.10 Through the GFXC, the Code will remain a single, global Code. The GFXC plans to assess periodically whether there are developments in the wholesale FX market that should be reflected in the Code. Less frequently, the GFXC plans to oversee a more comprehensive review of the Code through a process similar to the one developed during the drafting of the Code. In addition, the GFXC plans to monitor the success of the Code by looking at such indicators as awareness of the Code, commitments to adopt the Code, implementation, and views on the effect of the Code on market practices and transparency.
The GFXC has hit the ground running. Given the diversity of views on last look in the market, the GFXC today is requesting feedback, specifically on trading in the last look window in FX markets. That request is open to any interested members of the public, and can be accessed through the new globalfxc.org website.
Two years of collaborative effort have resulted in the publication of the Code, and in that sense the challenge set by the central bank governors in May 2015 has been met. However, the true challenge—the real-world success of the Code—lies ahead, and it lies in the behavior of market participants.