It’s finally been released, the 76 page FX Global Code of Conduct, developed by the Bank of International Settlements (BIS), in conjunction market participants and working groups, to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale FX Markets.
It is not legally binding, but designed to supplement local rules, regulations. It is intended to promote a robust, fair, liquid, open, and appropriately transparent market in which a diverse set of Market Participants, supported by resilient infrastructure, are able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behaviour.
Covering a set of six standards and leading principles: Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance, Confirmation and Settlement Processes.
Below I expand to show the key principals within each leading principle, and at end of coverage, a link to full code.
Covering a set of six standards and leading principles:
- 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 a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of
their FX Market activity and to promote responsible engagement in the 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
- 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 - Risk Management and Compliance: Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage,
and report on the risks associated with their engagement in the FX Market - 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
The code applies to all ‘Market Participants’ of the wholesale FX markets, including: sell-side and buy-side entities, non-bank liquidity providers, operators of E-Trading Platforms, and other entities providing brokerage, execution, and settlement services.
- Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market
1) Market Participants should strive for the highest ethical standards
2) Market Participants should strive for the highest professional standards
3) Market Participants should identify and address conflicts of interest
- Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of
their FX Market activity and to promote responsible engagement in the FX Market
4) Adequate and effective structures and mechanisms to provide for appropriate oversight, supervision, and controls with regard to the Market Participant’s FX Market activity
5) Embed a strong culture of ethical and professional conduct with regard to their FX Market activities
6) Remuneration and promotion structures that promote market practices and behaviours that are consistent with the Market Participant’s ethical and professional conduct
expectations
7) Appropriate policies and procedures to handle and respond to potentially improper practices and behaviours effectively
- 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. 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.
8) Clear about the capacities in which they act
9) Handle orders fairly and with transparency in line with the capacities in which they act
10) Handle orders fairly, with transparency, and in a manner consistent with the specific considerations relevant to different order types
11) Only Pre-Hedge Client orders when acting as a Principal, and should do so fairly and with transparency
12) Not request transactions, create orders, or provide prices with the intent of disrupting market functioning or hindering the price discovery process
13) Understand how reference prices, including highs and lows, are established in connection with their transactions and/or orders
14) The Mark Up applied to Client transactions by Market Participants acting as Principal should be fair and reasonable
15) Identify and resolve trade discrepancies as soon as practicable to contribute to a well-functioning FX Market
16) Market Participants acting as Voice Brokers should only employ name switching where there is insufficient credit between parties to the transaction
17) Last look should be transparent regarding its use and provide appropriate disclosures to Clients
18) Market Participants providing algorithmic trading or aggregation services to Clients should provide adequate disclosure regarding how they operate
- Information sharing
19) Should clearly and effectively identify and appropriately limit access to Confidential Information
20) Should not disclose Confidential Information to external parties, except under specific circumstances
21) Should communicate in a manner that is clear, accurate, professional, and not misleading
22) Should communicate Market Colour appropriately and without compromising Confidential Information
23) Should provide personnel with clear guidance on approved modes and channels of communication
- Risk Management and Compliance:Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage,
and report on the risks associated with their engagement in the FX Market.
24) Should have frameworks for risk management and compliance
25) Should familiarise themselves with, and abide by, all Applicable Law and Standards that are relevant to their FX Market activities and should have an appropriate compliance framework in place
26) Should maintain an appropriate risk management framework with systems and internal controls to identify and manage the FX risks they face
27) Should have practices in place to limit, monitor, and control the risks related to their FX Market trading activity
28) Should have processes in place to independently review the effectiveness of and adherence to the risk management and compliance function
Counterparty Credit
29) Should have adequate processes to manage counterparty credit risk exposure, including where appropriate, through the use of appropriate netting and collateral arrangements, such as legally enforceable master netting agreements and credit support arrangements
30) Should have processes to measure, monitor, report, and manage market risk in an accurate and timely way
31) Should have independent processes in place to mark-to-market trading positions to measure the size of their profit and loss and the market risk arising from trading positions
32) Should have appropriate processes in place to identify and manage operational risks that may arise from human error, inadequate or failed systems or processes, or external events
33) Should have business continuity plans (BCPs) in place that are appropriate to the nature, scale, and complexity of their FX business and that can be implemented quickly and effectively in the event of large-scale disasters, loss of access to significant trading platforms, settlement, or other critical services, or other market disruptions
Technology Risk
34) Should have in place processes to address potential adverse outcomes arising from the use of or reliance on technological systems (hardware and software)
Settlement Risk
35) Should take prudent measures to manage and reduce their Settlement Risks, including prompt resolution measures to minimise disruption to
trading activities
Compliance Risk
36) Should keep a timely, consistent, and accurate record of their market activity to facilitate appropriate levels of transparency and auditability and have processes in place designed to prevent unauthorised transactions
37) Should perform “know-your- customer” (KYC) checks on their counterparties to ascertain that their transactions are not used to facilitate money laundering, terrorist financing, or
other criminal activities
38) Should have in place reasonable policies and procedures (or governance and controls) such that trading access, either direct or indirect, is limited to authorised personnel only
39) Should generate a timely and accurate record of transactions undertaken to enable effective monitoring and auditability
Legal Risk
40) Should have processes in place to identify and manage legal risks arising in relation to their FX Market activities
Prime Brokerage Participants
41) should strive to monitor and control trading permissions and credit provision in Real Time at all stages of transactions in a manner consistent with the profile of their activity in the market to reduce risk to all parties
- 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.
Overarching Principals
42) Should establish consistency between their operating practices, their documentation, and their policies for managing credit and legal risk
43) Should institute a robust framework for monitoring and managing capacity in both normal and peak conditions
44) Market Participants are encouraged to implement straight-through automatic transmission of trade data from their front office systems to their operations systems
45) Should conduct any novations, amendments, and/or cancellations of transactions in a carefully controlled manner
Confirmation Process
46) Should confirm trades as soon as practicable, and in a secure and efficient manner
47) Should review, affirm, and allocate block transactions as soon as practicable
48) Should identify and resolve confirmation and settlement discrepancies as soon as practicable
49) Should be aware of the particular confirmation and processing features specific to life cycle events of each FX product
Netting & Settlement Processes
50) Should measure and monitor their Settlement Risk and seek to mitigate that risk when possible
51) Should utilise standing settlement instructions (SSIs)
52) Should request Direct Payments
53) Should have adequate systems in place to allow them to project, monitor, and manage their intraday and end-of-day funding requirements to reduce potential complications
during the settlement process
Account Reconciliation
54) Should perform timely account reconciliation processes
55) Should identify settlement discrepancies and submit compensation claims in a timely manner
Full Code available here:
eTrading-Insights 