FX global code adoption ‘slower than expected’

Four months after the FX global code was published, Citi is the only top-five foreign exchange market maker to have publicly committed to the landmark set of principles of good practice, although others claim to be well advanced in implementing its provisions.

Five FX business managers at Citi, including Nadir Mahmud, global head of foreign exchange and local markets, signed a statement of commitment on May 25 – the day the code was published – which appears on the website of FX industry utility CLS, the first company to operate a public register of code adherents.

Aside from Citi and CLS itself, BBVA is the only other firm to appear on the register at this stage, while the Australian Foreign Exchange Committee has also published commitments from Westpac and Queensland Investment Corporation. Other firms to have publicly committed include Saxo Bank, Nordea, Barclays, Hotspot and MarketFactory. But leading market makers including JPMorgan, Deutsche Bank, UBS and Bank of America Merrill Lynch have not yet published a signed statement of commitment.

“Adoption has been slower than some might have expected, but that extra step of signing the statement of commitment needs to be thorough and comprehensive, and may involve a tremendous body of work to get systems, controls, training programmes and monitoring programmes to the required level,” says Mike Lawrence, global chief administrative officer for foreign exchange and local markets at Citi.

The FX global Code came about after two years of drafting by a coalition of central bankers, with input from a large working group of market participants, in response to a lack of good conduct exposed by the benchmark scandal. The 55 principles cover a range of industry practices, but it is those relating to execution processes and information sharing that have attracted the greatest scrutiny.

On the contentious practice of last look, whereby a liquidity provider is given a final opportunity to accept or reject a trade request against its quoted price, the code ruled only that market participants must be transparent and make appropriate disclosures when using last look.

But central bankers recognised the strength of feeling surrounding the issue, opening the last look debate up to a further round of industry consultation, which closed in September. The consultation responses will be published before the next meeting of the newly formed Global FX Committee (GFXC) on November 14.

The controversy over last look shows no sign of abating, however, with platforms such as LMAX Exchange calling for it to be banned on anonymous multi-dealer platforms, while dealers would like it preserved, though they stress that potentially disruptive practices such as pre-hedging during the last look window should be outlawed.

“We strongly believe that the practice of last look, narrowly and symmetrically applied as a financial risk management control, can contribute to ensuring that clients get the best of our execution capabilities and pricing,” says Itay Tuchman, global head of foreign exchange trading at Citi.

It remains to be seen what direction the GFXC might take on last look, but the committee will want to accelerate industry adoption of the code over the coming months. While adherence is voluntary, firms have been encouraged to sign the short statement of commitment and the GFXC has issued guidelines for the development of public registers to make those statements easy to find.

Speaking at the TradeTech FX Europe conference in Barcelona on September 12, Chris Salmon, executive director for markets at the Bank of England and chair of the GFXC, said he was encouraged by the early progress, with 20,000 individual downloads of the code and around 10 published statements of commitment.

“If individual firms come to expect that counterparts will have committed to the code, and have the means to see whether that is the case, then the code will become woven into the fabric of the market. Central banks are taking a lead on this, reviewing their own practices and setting clear expectations with their FX counterparts,” said Salmon.

Given its voluntary nature, there is no hard-and-fast deadline for signing a statement of commitment, but it is widely expected that the majority of major market participants will sign up in the coming months as they continue to review their business practices. For large institutions with multiple businesses that access the FX market, this is process may yet take some time.

“We fully support the code. We are working through a process of confirming our compliance with the code across our operations globally. We will issue a formal statement of commitment to the code once this process is complete,” says a spokesperson for Deutsche Bank. “We can expect leading firms involved with the central bank FX committees – and there are many – to be visible on various registers within the next three to six months,” adds James Kemp, managing director of the global FX division of the Global Financial Markets Association (GFMA). “I expect we will see more registers in the next few months as industry participants complete the internal processes involved with finalising their adherence statements and look for the right venue to be able to post this.”

Officials at JPMorgan, UBS, BAML, XTX Markets and Citadel Securities declined to comment for this article.