Debelle sets timeframe for adoption of FX Global Code

Market participants are expected to adjust their practices to the principles outlined in the Bank for International Settlements’ (BIS) Global Code of Conduct within 12 months of its publication, Guy Debelle, deputy governor of the Reserve Bank of Australia, told attendees at the third FX Week Australia conference in Sydney.

Debelle warned foreign exchange participants to familiarise themselves with the principles of the Code once it is published on May 25, and verify their operations are aligned with them. Echoing previous remarks, he said for the Code to be effective, it will need to be accepted and endorsed across the full spectrum of the FX market.

“Given that we are only providing the full text of the Code to the market in May, there will be a period of time for market participants to adjust their practices where necessary to be in line with the principles in the Code,” Debelle said.

“Hopefully, not much time should be required to do this. This period of time might potentially be as short as six months, but no more than 12 months for the vast majority of market participants. How much effort this might require will in part depend on the nature and extent of your engagement with the FX market. In drafting the Code, we have always kept the principle of proportionality at front of mind,” he added.

Since the launch of the initiative in May 2015 to create a single global code of conduct for the wholesale FX market, participants have been wondering how the BIS plans to ensure a widespread adoption of the Code and whether a principles-based standard could be as enforceable as a rules-based one.

Debelle explained to the audience that the more prescriptive a code is, the easier it is to get around: “Rules are easier to arbitrage than principles. Moreover, the more prescriptive and more precise the code, the less people will think about what they are doing. If it’s principles-based and less prescriptive then market participants will have to think about whether their actions are consistent with the principles of the Code.”

As for concerns regarding adherence, Debelle outlined the importance for firms to understand they have an interest in making sure the Code is embedded in their practices. Such practical steps include training staff, and introducing appropriate policies and procedures.

In addition, Debelle announced the BIS has provided a draft Statement of Commitment for firms to publicly demonstrate their adherence to the Code, and he said the BIS will provide a more comprehensive description of the suite of mechanisms to support adherence alongside the release of the finalised version in less than two months.

“One reason for a public demonstration is that firms are more likely to adhere to the Code if they believe their peers are doing so too. That important source of pressure to adhere should come from other market participants,” he said.

“Without blaming them for what occurred, more scrutiny from counterparties about how their FX transactions were being executed may have helped to reduce the incidence and severity of the market abuses that occurred in the past. One reason for this lack of scrutiny was that FX transactions were sometimes regarded as ancillary to the core business, notwithstanding their potential impact on returns. This attitude seems to be in decline, though it still persists,” Debelle added.

The first phase of the Code was released in May 2016, covering areas such as ethics, information sharing, and aspects of execution, confirmation and settlement. The second phase will include further aspects of execution such as electronic trading and platforms, prime brokerage, governance, risk management and compliance.

So far, the BIS has received a few thousand comments from participants, following the distribution of drafts of the full text of the Code through various foreign exchange committees in recent months. Additional input has been provided by the Market Participants Group, led by David Puth and representing the private sector.

Outside of a small number of contentious areas, the feedback was reflective of a widely held consensus. Market participants have recognised the Code’s aim of helping [to] move the FX market to a better place

Guy Debelle, Reserve Bank of Australia

“In my view, the text of the Code provides the best and most appropriate guidance we could give, given the sometimes wide range of feedback received, particularly on those small number of issues that are most controversial in the market. The most obvious example is last look. This issue has generated considerable passionate discussion. I would expect that discussion to continue after the release of the Code in May and that the Code might evolve as a function of that discussion,” Debelle said.

“I would like to make the point that if market participants think it would be preferable for the Code to have gone further, they are welcome to go down that path in their operations. On the other hand, it would not be desirable for the converse to occur, namely for market participants’ practices to fall short of the principles described in the Code,” he continued.

“That said, I think it is a good outcome of the process that we were able to distill the points of contention down to a small number of not insignificant issues. Outside of a small number of contentious areas, the feedback was reflective of a widely held consensus. Market participants have recognised the Code’s aim of helping [to] move the FX market to a better place,” he added.