Bank of Russia joins Global FX Code

We take a look at the ethos and origins of the Global FX Code, and how Russia’s FX brokers may well align with those of the West as a result of the Russian Central Bank’s position

The Bank of Russia has announced via its Press Service that it is committed to the principles of the FX Global Code after comparing the code provisions, the norms of the legislation of the Russian Federation, and its own business processes.

The FX Global Code was developed by a working group of the Bank for International Settlements in Basel comprising representatives of central banks and market participants from 16 countries. It is a set of global principles of good practice in the foreign exchange market.

In its efforts to maintain a stable, liquid, open and transparent foreign exchange market in the Russian Federation, the Bank of Russia also calls for adherence to the FX Global Code. Market participants can declare their intention to perform their activity in accordance with the Code principles by publishing a statement of commitment on their website.

The Code does not impose legal or regulatory obligations on market participants, nor does it substitute for national standards or rules, but rather it is intended to serve as a supplement to local laws and regulations.

The FX Global Code is maintained and updated by the Global Foreign Exchange Committee. It is setting global principles of good practice standards in the FX market, promoting the integrity and effective functioning of the wholesale FX market.

The regulator notes that individuals subject to the Senior Managers and Certification Regime (SM&CR) need to meet the requirements for market conduct, for both regulated and unregulated activities. Behavior that is in line with an FCA recognised code, such as the FX and MM Codes, will tend to indicate a person subject to the SM&CR is meeting their obligation to observe ‘proper standards of market conduct’.

In Britain, the Financial Conduct Authority (FCA) consulted on recognition of the codes in December 2018. The consultation responses all agreed that they met the recognition criteria and that the FCA should recognise both.

The FX Global Code and UK Money Markets Code will be recognized for 3 years. The FCA can extend the period if appropriate and if it finds these codes are still relevant. The recognition of these codes is as they stand at the current date. If the FCA believes that the codes no longer represent proper standards of market conduct, the regulator will withdraw recognition before the end of the 3-year period. The SM&CR rules do not change because of the recognition of these codes.

Importantly, the FCA says it does not intend to supervise firms or individuals directly against these codes in unregulated markets. The regulator stresses that its role is to make sure that firms meet their governance, and systems and control obligations, including under the SM&CR. The FCA expects firms and individuals to consider both the spirit and letter of code provisions to make sure they fully meet ‘proper standards of market conduct’. Compliance with codes may be one way to show evidence they are compliant with the FCA’s overall governance requirements.

The FCA stresses that it will not take action based solely on a breach of provisions in market codes (recognised or not). Codes may be used as evidence and relied upon in determining what proper standards are, or were believed to be, at the relevant time.

Recognition of a market code does not change the FCA’s enforcement approach. It is not a new basis for enforcement, and does not enhance the FCA’s ability to take enforcement action.

Just a few weeks later, at the beginning of 2019, the Global Code was discussed in a two-day meeting held in Sydney on 4-5 December 2018, the GFXC discussed the feedback on the Code that it had received from market participants and agreed to focus its work on the following areas:

  • Buy-Side Outreach. The Working Group on Buy-Side Outreach presented further materials they had developed for promoting the Code to buy-side participants, including a frequently-asked-questions (FAQ) about the Code and case studies of buy-side firms that have adopted the Code. The GFXC will publish these materials on the GFXC’s website in the New Year. Nevertheless, the GFXC recognised that further work remains to be done to gain greater adherence to the Code amongst the buy-side and to address the issues raised in the feedback on the Code. Hence the Working Group will continue its work in this area.
  • Anonymous trading. The GFXC’s Working Group on Disclosures presented its work on anonymous E-trading platforms, highlighting several areas where additional guidance in the Code might be appropriate. This includes usage of ‘tags’ (unique identifiers) and the roles and responsibilities of the different market participants, including prime brokers. A report describing the anonymous E-Trading landscape will be published by the GFXC in the New Year.
  • Disclosures. The GFXC acknowledged that the clarity and adequacy of some elements of disclosures made by market participants remained an issue, as shown by the recent GFXC Survey results and other market feedback. The GFXC had published supplemental material aimed at strengthening the disclosure landscape in February 2019, but adoption so far appeared slow. A working group will be set up to focus on ways to accelerate the adoption of more effective disclosures.
  • Algorithmic trading and Transaction Cost Analysis (TCA). The GFXC agreed that the increasing usage of algorithmic execution warranted a review of the Code’s existing guidance in this area. It was also decided to consider how guidance around TCA could be incorporated into the Code.
  • Execution principles. The GFXC discussed the extensive feedback on various execution principles in the Code, particularly those dealing with pre-hedging and last look. It was agreed that there was a clear need to respond to this feedback.

The main output of the five working groups were formed to comprise explanatory material to market participants on the Code’s guidance in these areas. In some instances, the GFXC would also consider small modifications to the wording of the principles.

Commenting on the feedback, GFXC Chair Guy Debelle said “the strong consensus from the feedback is the Code remains fit-for-purpose. There are, however, a few key areas which warrant close review to ensure the Code is providing appropriate guidance and contributing to an effectively functioning market. The Code also needs to remain in step with the evolution of the FX market.”

The GFXC also discussed the broader findings from its Annual Survey of market participants conducted in September and October. Results presented by the GFXC’s Working Group on Embedding the Code show that:

  • adoption of the Code has continued to increase amongst survey respondents. While most use the Statement of Commitment they do not always post it on a public register;
  • the majority of respondents using algorithms do so to improve their execution outcomes and minimise information leakage. Respondents that opt not to, note that algorithms do not suit their trading style; and
  • perceptions of the overall quality of disclosures were broadly positive although the picture was more mixed with regards to disclosures around the use of last look and pre-hedging, with sell-side and buy-side participants having different views.

The Global FX Code was a long time in the making, and FinanceFeeds could absolutely foresee its formation.

In mid-2017, whilst Mr Debelle was still Deputy Governor of the Reserve Bank of Austrealia, a source in Melbourne, Australia explained to FinanceFeeds “My understanding is that the changes may have far reaching effects on the lower capitalised FX Brokers operating in Australia.”

He was absolutely right.

At that time, instead of implementing rulings on client money via ASIC, the Australian government is looking at doing so at central government level under the Corporations Act 2001, authored by the Minister for Revenue and Financial Services.

Adding to this, Mr Debelle said in June 2017 whilst in London addressing a panel of senior financial sector executives regarding the launch of the FX Global Code “Today marks the culmination of two years’ effort to develop the FX Global Code and the associated adherence mechanisms.”

“It has involved considerable input from many foreign exchange market participants, both public and private. Today I will reiterate the motivation for the work, highlight the main features of the Code and adherence, summarise how we have developed the Code and outline the way forward” he said.

“Firstly, why is the work going on? The FX industry has been suffering from a lack of trust. This lack of trust is evident both between participants in the market and, at least as importantly, between the public and the market. The market needs to move toward a more favourable and desirable location, and allow participants to have much greater confidence that the market is functioning appropriately” – Guy Debelle.

Counterparty risk is of particular concern in markets for derivatives, due to the complexity of evaluating counterparty risk in that context, and exceptions to the limitations in the Corporations Act on the use of money related to derivatives or a dealing in a derivative.

The use of derivatives has developed beyond what was contemplated when the existing client money regime came into effect. For example, at that time, it was uncommon for retail clients to deal in over-the-counter derivatives. This is no longer the case.

Wholesale clients typically have substantial experience dealing in derivatives and the capacity to assess risks associated with the use of their money. However, when providing authorisations to withdraw moneys from their accounts, retail clients may not understand or appreciate the risks associated with their client money being used for any purpose of the AFS licensee. Thorough assessment and evaluation of counterparty risk in derivatives markets is complex, and cannot be reasonably expected of retail clients. The changes contained in the Client Money Regulations ensure retail client money is appropriately protected.

Given that all FX, including the activities of retail FX brokers in Russia is overseen by the Central Bank, this may well shape the regulatory structure of things to come, and align Russia with the western world in terms of how FX is transacted.

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