With The Full FX View
The UK’s Financial Conduct Authority (FCA) has renewed its recognition of the FX Global Code, Global Precious Metals Code, and UK Money Markets Code under its code recognition scheme, which was launched in 2018.
The three codes are reviewed and updated where necessary every three years, the last time this occurred was earlier this year, hence the FCA’s move. The recognition means that the FCA effectively uses the codes, where necessary, as its benchmark for conduct in the relevant industries. It has previously stated that it expects firms and individuals to consider both the spirit and letter of code provisions to make sure they fully meet ‘proper standards of market conduct’.
The updated recognition has been welcomed by both the Global Foreign Exchange Committee, which manages the FX Global Code, as well as representatives of the Bank of England. Gerardo García, chair of the GFXC and general director of central banking operations at the Bank of Mexico, says, “I welcome the FCA’s recognition of the FX Global Code, particularly given the importance of London in the global FX market.”
His sentiments are echoed by Andrea Rosen, director of markets, Bank of England and chair of the London Foreign Exchange Joint Standing Committee (FXJSC), who says, “I welcome the FCA’s recognition of the revised FX Global Code, which reinforces the importance of transparency, integrity, and good conduct in the wholesale FX market. The widespread adoption of the Code, evidenced by over 1,300 Statements of Commitment, demonstrates the industry’s strong appetite for aligning with global best practices. Greater participation from the hedge fund community, given its significant presence in the FX market, would further strengthen the Code’s role in promoting a fair and effective marketplace.”
The UK Money Markets Code, alongside an updated explanatory note and FAQ document, is maintained and updated by the UK’s Money Markets Committee, which operates under the auspices of the Bank of England. It sets standards and best practice expected from participants in the deposit, repo and securities lending markets in the United Kingdom. Matt Roberts-Sklar, head of sterling markets at the Bank of England, says: “The Code’s fundamental purpose remains to ensure trust exists in the UK Money Markets. FCA recognition is helpful in providing further assurance of fairness and transparency for all.”
The importance of this move should not be underestimated – effectively, if the FCA investigates allegations of misconduct in markets, everyone will know the grounds on which it is basing any decision. Equally, this could also extend to the legal system, for while a mantra of the creators and managers of the Code has been it is not regulation, the fact that a regulator is using it to judge enforcement cases should hold some sway with judge and jury.
There is an argument that says this model – which is replicated in Australia with that country’s regulator ASIC – is the way forward. By having national regulators recognise the Code and stress how they will use it as their benchmark for judging behaviour, a loose connection would be formed between what is a voluntary Code, and the regulatory system. If nothing else, this would make market participants who are not signed up to the Code sit up and pay attention.
Andrea Rosen from the Bank of England, makes an oblique reference to this point in her quote, when she says “…Greater participation from the hedge fund community, given its significant presence in the FX market, would further strengthen the Code’s role in promoting a fair and effective marketplace…”
Getting hedge funds in particular on board has been challenging, but if there was the explicit risk of the FCA taking a closer look at firms that do not sign up to the Code, a door that is currently firmly shut, may be prised open. This would also be the case for asset managers, for while sign up has been OK in this sector, there are still many more who could do so that haven’t. Typically, this sector is more sensitive to regulatory movements than hedge funds, so hopefully this is an opportunity for the GFXC’s outreach effort to hit harder than it has before.
There is one final note from the FCA’s renewal that the sell side could heed. While there has been no formal statement from the FCA on the renewal, when it first renewed its recognition in 2021, it made the following explicit, additional, statement. “Regardless of the terminology used, last look practices that incorporate a delay that is additional to what is required to complete price and validity checks (some market participants refer to such deliberate delays as ‘additional hold time’) are not consistent with the Codes. For example, market participants should not prolong the duration of the last look window for the purpose of seeing if future prices move in their favour in relation to the client’s trade request.”
Asymmetric hold times are still a feature of the FX market, especially on multi-dealer platforms, therefore this statement, which clearly frowns upon the practice, should send a minor shudder through participants.