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The FX Global Code: articulating new conduct standards

The FX Global Code: articulating new conduct standards

What led to the introduction of a new FX Global Code?

Aspasia Lioliou

Global FS Regulatory Programme Executive, EMA FS Risk & Regulatory Insight Centre

KPMG in the UK


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Several scandals, which have surfaced since the 2008 global financial crisis, revealed significant malpractice around rigging of the foreign exchange benchmark rates and market manipulation. These activities damaged the reputation of FX markets, by undermining the transparency of market-based exchange rates that provide benchmarking capabilities and support fair and efficient economic functions. Regulators have punished implicated financial firms severely - six banks were fined $5.6bn over rigging FX markets.

The new Code, published by the Foreign Exchange Working Group (FXWG) of the Bank of International Settlements (BIS), seeks to restore public trust and confidence in the FX market. It was jointly developed by central banks and market participants. Reserve Bank of Australia Deputy Governor, Guy Debelle, who headed the FXWG said:

All of us recognise the need to restore the public’s faith in the foreign exchange market. We share the view that the global code plays an important role in assisting that process and also in helping improve market functioning.”

What is the FX Global Code?

The FX Global Code is a common set of guidelines, which provide fair practice recommendations and revolve around six leading principles and 55 supporting principles. Aiming at enhancing the overall integrity and effective functioning of the FX Market, the Code reflects high ethical standards and sets good practice guidelines for market participants in support of fair and efficient markets.

The Code is expected to apply to a wide range of FX market participants, including sell-side and buy-side firms, non-bank liquidity providers, operators of e-trading platforms, as well as firms providing brokerage, execution and settlement services for FX.

The FX Global Code is voluntary and non-enforceable. Its principles will be promoted and maintained by a ‘Global Foreign Exchange Committee’, formed of public and private sector representatives and representing a Global association of FX Committees.

The six areas of principal focus by the FX Global Code are:

  • Ethics: Fairness and integrity in the FX market should be promoted through ethical and professional behaviour.
  • Execution: FX transactions should be negotiated and executed with integrity and care.
  • Confirmation and settlement: Post trade systems, controls and processes should promote the predictable, smooth and timely confirmation and settlement of FX transactions.
  • Risk management and compliance: Risk arising from FX activity should be identified, managed and reported through an effective control and compliance environment.
  • Information sharing: Communications should be clear and accurate and should protect confidential information.
  • Governance: Clear accountability and oversight of FX market activity should be maintained through an effective governance framework.

What do firms need to do?

Essentially, the Code supplements local laws, rules and regulations. Firms will still be expected to:

  • understand and comply with laws, rules and regulations in jurisdictions where FX business is undertaken; and
  • ensure internal policies and procedures are in place and are designed to comply with applicable laws.

Firms are specifically encouraged to publish a voluntary ‘Statement of Commitment’ confirming their resolution to conduct business in compliance with its principles. Areas of particular consideration under the Code’s provisions are:

  • Governance and oversight: Accountability and effective oversight and arrangements to ensure ongoing adherence to the Code, encompassing all FX business activities.
  • Minimum standards: Definition of minimum standards that are applicable to firms, ensuring these standards are implemented through policies and procedures.
  • Impact assessment: Identification of relevant FX activities in all locations and front to back processes and functions impacted by the Code.
  • Control environment: Assessing how the existing control framework can support the Code and where control efficiencies can be gained by leveraging current arrangements.
  • Accountability: Establishing data and MI requirements to support senior management with strategic decision making and ongoing assessment of business compliance with the Code.
  • Training: Providing training to individuals to ensure that the Code and supporting principles are understood globally.
  • Attestation: ‘Statement of Commitment’ to attest that the firm has aligned its activities with the principles of the Code

It is expected that most firms will adopt the new Code. However, sufficient consideration must be given to some challenging questions before firms can sign up, including:

  • Who will authorise the commitment for the firm?
  • Will firms and individuals feel at ease in signing the commitment and adhering to its principles?
  • How do the principles translate into practical policies and procedures?

Support for firms

Firms will need support towards ensuring their adherence to the new Code’s guidelines. Effective tools and special methodologies may foster firms’ preparedness in relation to FX conduct standards, whilst industry benchmarking insights may help firms understand their comparative market position.

KPMG provides a comprehensive package of services to address the requirements and necessary compliance programmes, ranging from diagnostics assessments and optimisation of recommendations, through to implementation and assurance.

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