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What the new FX Code means for UK banks

What the new FX Code means for UK banks

A new global code governing the foreign exchange (FX) market puts the onus on banks to commit to new standards. What should those trading FX do now?

Lucas Ocelewicz

Partner, Banking Risk

KPMG in the UK


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Global push to define FX conduct standards

Global currency market (FX) trading is a $5.1 trillion-a-day business, but despite its size and global scope, the market has never had a consistent set of rules – until now. On 25 May 2017 it received a global set of conduct standards – the FX Global Code.

Firms are encouraged to publish a voluntary statement confirming they will conduct business in a manner consistent with the Code’s principles and we expect most large firms to adopt this –recognising that clients and regulators expect them to. However, they still need to address some challenging questions before they can sign up:

  • Who will authorise the commitment for the firm? Will they sign on behalf of a specific business line, location or the whole firm?
  • Will firms and individuals feel at ease signing the commitment and adhering to its principles?
  • How do principles translate into practical policies and procedures, particularly in fast-evolving areas such as electronic trading and in the context of the business model where clear distinctions between market-making, principal and agency concepts are often blurred?

These questions will be particularly challenging for UK-based firms, where the Senior Manager Regime places personal accountability on individuals. Banks need to demonstrate they have solid, transparent procedures in place to comply with the code.

What does the Code say?

The Code itself is a common set of guidelines developed jointly by Central Banks and market articipants from 16 global jurisdictions. The Code is built around six leading principles, including ethics, execution and information sharing and 55 supporting principles that set out good practices with the aim to enhance overall integrity and effective functioning of the FX market.

The Code is expected to apply to a wide range of firms that participate in the FX market. This includes both sell-side and buy-side firms, non-bank liquidity providers, operators of e-trading platforms, as well as firms that provide brokerage, execution and settlement services for FX.

Long-overdue standards

On the back of trading concerns uncovered in 2013, firms have paid over $10 billion in fines for misconduct in the FX market. The common theme highlighted by many involved in investigations, and the subsequent remediation, was the lack of clearly defined industry standards, specifically for the FX spot market.

Following the investigations, regulators made their expectations of good conduct clear: “We [the Financial Conduct Authority] expect firms to identify, assess and manage appropriately the risks that their business poses to the markets in which they operate and to preserve market integrity, whether or not those markets are regulated”.

The FX Global Code is the first truly global set of standards for all FX market participants setting the minimum benchmark for expected good market conduct and practices. Although the Code does not impose legal or regulatory obligations on market participants, nor does it substitute for regulation, its endorsement by central banks, representing the 15 largest currency areas, sends a clear message to the market. Whether formally or not, we expect regulators in the largest FX centres to use the Code as a benchmark to assess firms’ conduct.

Read more about the new FX Global Code (5 minutes)

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