The FX Code of Conduct – a new Regulatory Priority. Author. John Hoff and Elizabeth Campbell. Jan 14, 2020.
The issue…
The expectation is that beginning in 2020, there will be a US regulatory focus (driven by the Federal Reserve Bank and the UK’s Financial Conduct Authority) on Banks and Financial Services firms evidencing proper implementation and proof of compliance with the FX Global Code of Conduct. This will be a priority item of the FRB’s 2020 supervisory process.
Although the FX Global Code does not impose legal or regulatory obligations on Market Participants, the focus by US Regulators on FX market issues remains high as they continue to deal with legacy and new behavioral issues in the FX Market.
While the FX Code specifically states that it is a guide and does not replace any local regulations, most requirements are in the current US regulatory structure. To date, regulatory focus has been on firm adoption of the FX Code, build-out of internal knowledge and oversight apparatus, and prosecution of major legacy cases.
How can we help?
• Broyd Partners possess deep knowledge of the FX Global Code of Conduct and have extensive experience in regulatory compliance, project management, and the FX Market. (Bios attached)
• Broyd Partners will partner with firms to guide them every step of the way through the review, analysis and remediation stages to evidence compliance with the FX Code.
• Broyd Partners will work with firms to outline the FX Code requirements and actions, assess a firm’s current state of compliance, and provide guidance and project management for any gaps and remediation efforts.
What is the FX Global Code of Conduct?
The FX Global Code is “a set of global principles of good practice in the foreign exchange market.” • Established in 2017 as a joint effort of dealers, clients, and regulators from 16 jurisdictions. • Over 400 institutions and regulators have agreed to the Code. • The Code is focused on market abuse and behavior towards clients and is a direct result of evidenced market issues. • Proper supervision at all levels is a key component of the Code. • The FX Global Code does not replace or modify applicable law in each jurisdiction and should be read as a guidance and reference for Market Participants. Market Participants must be aware of and comply with applicable laws in their respective jurisdictions.
The FX Code is organized into 6 “Leading Principles” which break down into 55 specific principles. The Code outlines general expectations and requirements rather than set out specific rules. That said, the Code principles are rather detailed.
- The Code is 76 pages, with 6 Leading Principles and 55 subsequent principles providing further detail under each as to how to implement, control and verify compliance with these principles.
- The Code contains a “Statement of Commitment” allowing firms to express their commitment to the Code.
- A public register lists central banks that have stated their commitment to the Code. The public register contains 45 items (as of December 2019) from central banks around the globe.
- In addition to the principles and Statement of Commitment, the FX Code also includes illustrative examples of how and where the Code could apply, organized by Leading Principle.
The 6 Leading Principles of the FX Code
Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market.
Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX Market activity and to promote responsible engagement in the FX Market.
Execution: Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent FX Market.
Information Sharing: Market Participants are expected to be clear and accurate in their communications and to protect Confidential Information to promote effective communication that supports a robust, fair, open, liquid, and appropriately transparent FX Market.
Risk Management and Compliance: Market Participants are expected to promote and maintain a robust control and compliance environment to effectively identify, manage, and report on the risks associated with their engagement in the FX Market.
Confirmation and Settlement Processes: Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX Market.
A sampling of Requirements/Action Items:
• Fully disclosed Execution Policy encompassing treatment of various order types, use of algorithmic and aggregation strategies, mark-ups, use of reference prices, last look, fixings, etc.
• Confidential Information policies and controls must include the protection of both internal and client trade and order information.
• Market Abuse Policy must be in place and includes a broad definition of abuse.
• Market Participants should have adequate processes in place to support the rejection of Client orders for products they believe to be inappropriate for the Client.
• Significantly enhanced client disclosures and transparency.
• Definition, identification, and control of Conflicts of Interest.
• Policies and Procedures must reflect the participation and responsibility of supervisors and senior management.
• Numerous requirements and appropriate mechanisms for escalation of wrongdoing.
• Specific requirements as to content and audience for client communications.
• Risk Control Requirements, encompassing Market, Credit, Operational, Technology, Compliance and Legal risks.
• Independent Review of Risk Management framework, structure and activity.
• Independent Review of Compliance Policies and Procedures for Fit for Purpose and Effectiveness.
• Recordkeeping Requirements: Trade records, communications, complaints, confidential information.
• Trading Access Controls • Transmission of Trade Data, Confirmation Process, Settlement Requirements • Management of Funding Requirements.
Initial Health Check
The Code requirements are very broad, but the action items are rather specific.
Banks may assume they are broadly aligned with the FX Code however Broyd Partners recommends an analysis and review of policies, procedures, controls, and disclosures against the specifics of the Code. With 150 Action Items, it is possible that there will be gaps identified, or process not completed that will be identified by the regulator and cause them to require further action.
Broyd Partners has a team of people with deep experience in Regulatory Compliance in Markets activities; with a team of people with a background as traders and salespeople; as risk and compliance specialists and working with regulators. (Bios attached)
Broyd Partners can perform a rapid ‘health check’ against the FX Code of Conduct and help you identify and remediate any gaps.
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