In recent years, misconduct revelations in relation to foreign exchange (FX) trading have dogged the FX market. Billions in fines have been levied by the Financial Conduct Authority (FCA) and other global regulators against market players, significantly damaging trust in the FX market. In July 2015, central banks and market participants from 16 jurisdictions agreed to work in partnership to produce a set of common standards designed to promote the integrity and effectiveness of the FX market. The FX Working Group was established to produce and promote a new FX Global Code and, on 25 May 2017, the final code was launched. But what significance does its introduction have for UK market players, in particular banks, and what steps will need to be taken in response to it? As is often the case, it depends: on what kind of market participant you are, where you are based and your local regulatory environment.
The FX market is a highly diverse one with a wide range of participants, including central banks, global and regional banks, asset managers, funds, non-bank liquidity providers, operators of e-trading platforms, brokers and providers of settlement services.
Participants engage with the market in a range of ways and across various FX products. Whilst the FX Global Code (the Code) has been framed so as to apply as widely as possible, it is explicitly recognised in the code that there is no universal "one size fits all" approach to how the code is to be adopted.
The Code consists of 55 detailed principles grouped under 6 leading principles:
- Ethics: the requirement to behave in an ethical and professional manner
- Governance: the requirement for an effective governance framework with clear lines of responsibility
- Information sharing: the requirement for clarity and accuracy and protection of client confidentiality to promote a robust, fair, open, liquid and transparent market
- Execution: the requirement to exercise care when executing transactions
- Risk management and compliance: the requirement to maintain a robust compliance environment
- Confirmation and settlement processes: the requirement for robust, transparent and risk-mitigating post trade processes
The architects of the Code envisage that, in seeking to embed the code into their organisations, market participants will adopt measures appropriate to the size, complexity and type of business undertaken by them. It is not therefore expected that the measures to be adopted by a small, less complex market participant will be required to mirror those of a large and complex one.
Local regulatory environment
The code clearly states that it in no way supplants or modifies the laws, rules and regulations to which market participants are subject in their own jurisdictions. Rather, it is intended to serve as a general code of good practice.
Viewed in isolation, the Code is thus voluntary and does not itself impose legal or regulatory obligations on those to whom it applies. However, that is not the whole story. The way the code is viewed by a market participant's local regulator may well result in it becoming indirectly binding on that market participant. Indeed, local regulators are being encouraged by the FX Working Group to adopt the code as the relevant market standard. In the case of the UK, the Code was welcomed by the FCA as an industry standard to support their work (read the FCA statement) and non-compliance may have consequences not only for the participant itself, but also, through the Senior Managers and Certification Regime (SMCR), for individuals within the organisation.
The UK regulatory environment
Spot FX trading, which accounts for the vast majority of all foreign currency trading, sits outwith the "regulatory perimeter" of the FCA. However, as Edwin Schooling Latter, Head of Markets Policy at the FCA put it when speaking at FX Week Europe in November 2016: "That does not mean that the FX spot market is not of acute interest to the FCA as a regulator" (read his full speech). The very significant fines levied by the FCA in recent years are testament to that, as is the remediation programme the FCA announced in late 2014 with the aim of ensuring that UK FX trading firms took steps to address the root causes of previous failings.
The FCA reported that that remediation programme resulted in material improvements in controlled environments and governance amongst the 70% of UK-based FX trading firms that participated. With the implementation of the SMCR, the indirect impact of the Code will also immediately impact market participants in the banking sector for now, and all firms regulated or authorised under FSMA when the SMCR is extended from 2018.
The gateway to regulation is via the Conduct Rules which require compliance with "proper standards of conduct". In its press release welcoming the launch of the FX Global Code, the FCA stated: "We expect firms, Senior Managers, certified individuals and other relevant persons to take responsibility for and be able to demonstrate their own adherence with standards of market conduct. Our supervision of the SMCR rules supports this."
Consequently, in addition to embedding the individual guidelines contained in the Code itself, banks (and in due course, other entities covered by SMCR) will be required to give consideration to related SMCR issues such as undertaking gap analyses to identify accountability gaps, allocation and mapping of responsibilities, amendment of Statements of Responsibility as necessary and provision of appropriate staff training.
In conclusion, whilst the Code, viewed in isolation, is admirably brief and concise in its terms, when viewed in context, it can be seen to add another layer of complexity to the already complex UK regulatory environment.