FX Global Code of Conduct: all for nothing?
Kim Potts, Senior Associate at Corker Binning, takes a closer look at some of the FX Global Code’s principles, and asks how useful it will really be to firms that by now will have significantly strengthened their own compliance procedures…
May 2017 saw the publication of the FX Global Code of Conduct, a common set of guidelines for promoting integrity and the effective functioning of the FX market.
The FX Global Code is voluntary and there is, therefore, no power vested with any authority to enforce it. However, a number of organisations have voiced support for it. The Financial Conduct Authority issued a statement on the day of its release stating that it welcomed the Code and that it “expects 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”. It seems highly likely that the FCA will use the Code in the future as a measure to assess how firms have conducted themselves. The FX Global Code also contains a ‘Statement of Commitment’ that invites firms to use it not only to demonstrate their commitment to adopting the good practices contained in the Code, but also as a means to assess the commitment of other market participants.
The Code is an attempt by the industry to create a common set of standards to promote good practice following the significant damage caused by the benchmark rigging scandal that, in 2014, engulfed the market in allegations of collusion and market manipulation. The focus of the scandal was revealed to be the alleged collusion by traders around the 4pm London WMR Benchmark Rate, which caught the attention of the world’s media as chat rooms with names such as ‘the Cartel’ and ‘the Mafia’ were used.
Banks had failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.
In November 2014, the FCA fined five banks a total of £1.1 billion for failing to control business practices in their G10 spot FX trading operations. The FCA announced that the fines were the largest ever imposed by them to date. This was also the first time that the FCA had ever pursued a group settlement with banks in this way. The main allegations were that the banks, through ineffective controls, had allowed their G10 spot FX traders to put the bank’s interests ahead of those of their clients and that the banks had failed to manage obvious risks around confidentiality, conflicts of interest and trading conduct.
The FX Global Code is organised around six leading principles in the following areas: Ethics, Governance, Execution, Information Sharing, Risk Management and Compliance, and Confirmation and Settlement Processes. Guidance is provided for market participants through a number of principles in each of the six areas. Parts of the Code are extremely high level and offer little by way of detailed guidance. For example, the section on ‘Ethics’ covers generic principles, such as “market participants should identify actual and potential conflicts of interest that may compromise or be perceived to compromise the ethical or professional judgment of market participants”, that will undoubtedly already be covered in codes of conduct already in place at firms. It therefore remains questionable as to how useful such parts will be to market participants seeking a more detailed or practical reference point.
Annex 1 of the Code seeks to remedy this deficiency by providing illustrative examples that aim to discuss the situations in which the key principles could arise and how a market participant should or should not behave. However, this is coupled with a number of caveats that tell market participants that such examples should not be “understood or interpreted as precise rules”, and nor do they provide “safe harbour”.
Is information sharing still permissible?
Information sharing, and the extent to which it was alleged to have been abused, came to be at the heart of the FX scandal. The Code does not prescribe a ban on information sharing between market participants, but rather seeks to provide guidance on when and how such information can be shared.
Information sharing is dealt with by the Code at principles 19-23. Principles 19 and 20 cover the handling of confidential information, while principles 21-23 cover communications. The principles covering confidential information (principles 19 and 20) are in large part generic and simply reference broad concepts that arguably would not greatly assist a market participant. For example, market participants are advised (principle 19) that they “should not disclose confidential information except to those internal or external parties who have a valid reason for receiving such information, such as to meet risk management, legal and compliance needs”. Principle 20 provides some examples of when disclosure of confidential information might arise, but these are not exhaustive. Annex 1 also provides some further assistance by way of examples relating to confidential information, leaving a market participant to consider those and their own compliance procedures.
The Code may provide a useful starting point for an industry that must now show its commitment to promoting honest and ethical working practices
Market colour is dealt with at principle 22 and is a concept that attracted much focus as a result of the FX scandal. Put simply, market colour is information that tells traders what is happening in the market. One of the key issues for traders that emerged from the FX scandal was the line between the sharing of market colour and the sharing of confidential information. The FX Global Code makes it clear that sharing market colour is permissible (as opposed to the sharing of confidential information) and it provides a series of bullet points that aim to give guidance on what is and is not permissible. Helpfully, some clear lines are drawn – for example, communications should not disclose individual trading positions and flows should be disclosed only by price range and not by exact rates. However, the onus is placed on firms to provide their employees with clear guidance on how to share market colour appropriately. This is undoubtedly something that the FCA will expect firms already to have in place and it will therefore be important that firms heed this warning.
The release of the final Code at such a late stage after the FX scandal emerged raises the question as to how useful it will really be to firms that by now will have had to significantly strengthen their own compliance procedures. On the one hand, the Code may provide a useful starting point for an industry that must now show its commitment to promoting honest and ethical working practices. However, the onus remains fixed on firms to ensure they have detailed compliance procedures and adhere to its principles. It is anticipated that the Code will develop over time and it is hoped that it will evolve to provide more detailed guidance for market participants.