The FX Global Code

New Link Editor Client, Middle Office and Core Operations

The long-awaited global code of conduct for the FX market has been released.  The FCA have already published their statement which welcomes this code.  It has been openly championed by many organisations and is a significant leap in setting out guiding principles for the FX market.

Bill Hodgson interviewed David Newland, Partner at New Link Consulting, to find out what impact the FX Global Code will have on organisations and to get his views on how the industry will align themselves to the code.

Hi David, firstly can you highlight why this global code came to fruition?

There was a recognised need to restore the public’s faith in the global foreign exchange market after numerous scandals in 2013/2014 which led to a collective of high profile Banks being fined.  The FX Global Code is a collaborative effort of sixteen major jurisdictions involving both Central and Investment Banks, that sets out to provide the guiding principles to promote a fair, robust, open and transparent market.

What are those guiding principles?

There are six and they are:

  1. Ethics – where every Market Participant is expected to behave in an ethical and professional manner that promotes fairness and integrity. They should address any conflicts of interest whilst striving for “high professionalism”.
  2. Governance – every Market Participant should have a sound framework and governance model.
  3. Execution – care should be exercised when negotiating and executing transactions to promote a fair, robust, open and liquid market.
  4. Information Sharing where access to confidential information is appropriately limited and the necessary disclosures are in place. All Market Participants should clearly and accurately communicate in a professional manner.
  5. Risk Management and Compliance – have appropriate segregation of duty where the key risks are recognised. There needs to be a solid risk management framework, with an accurate record of transactions.
  6. Confirmation and Settlements – Consistency is key. Trades should be confirmed as soon as it’s practical and any discrepancies in confirmations and settlements to be resolved as soon as possible.  Straight-through processing (STP) is encouraged, supported by timely reconciliations.

There are some very important themes there.  What do you see will be the biggest challenge for organisations?

Organisations will need to get their heads around the importance of this code and how to align with its principles. Despite there not being any legal or regulatory obligation, it is important the FX Global Code must be adopted across the FX market.  Educating staff and implementing the necessary policies and procedures, which includes a solid escalation process, will be key.  Senior management will need to accept the challenge of promoting strong leadership and articulate the desired practices, values and conduct across their teams.

Are there any other key challenges you foresee?

The FX Global Code is about front to back maturation.  Many other markets have been forced to advance rapidly because of stringent regulation.  The FX market now needs to do it on its own and this Code is just the vehicle needed.  Some of the key challenges ahead will be cultural.  There is very little in the Code which can be challenged from a correctness perspective, but changing legacy ways of working is never that easy.

It will be important for Market Participants to have a sound governance structure such as the Three Lines of Defence model which clearly defines lines of responsibility and segregation of duties.

I also see that great emphasis will be placed on the settlement of trades, especially in terms of trade netting.  Organisations will need to accurately quantify and constantly measure their FX settlement risk and use the tools necessary to mitigate this.  Multilateral and bilateral netting should be favoured, including the use of payment-versus-payment settlement.  The use of multiple Standard Settlement Instructions for the same counterparty should not be used and Direct Payments are the way forward.

It is mentioned earlier that Straight-through processing (STP) should be encouraged and as we both know a lot of organisations really strive to achieve that 100% STP rate.  Do you think this is beneficial to an Organisation?

In short, yes, but care needs to be taken that control is not lost when STP is used so comprehensively.   There have been several recent examples in the press where STP has been the culprit for significant incidents.  This clearly highlights the importance of having the right controls in place.  Extra vigilance is required and strict policies will need to be in place to ensure that only genuine transactions are STP’d.   Organisations should consider tools with anomaly detection capabilities to support this activity and be constantly monitoring their operational risk deficiencies and defences.

As we are talking about mitigating various types of risk, can an organisation really prepare themselves for all eventualities when things go wrong?

It is imperative that all organisations understand their risk exposure and the guiding principles of the Code really emphasise that. All should have effective business continuity/resiliency planning.   We saw very recently in the press (concerning a large commercial airline), how important effective continuity planning is and how important it is to have a plan in place.

Rather than having a reactive mentality, the Code impresses on having resilient infrastructure to prevent the unthinkable from happening.

How can New Link Consulting help clients align themselves to the FX Global Code?

New Link Consulting has a proven track record with helping clients develop their Target Operating Model, especially Three Lines of Defence.  Being a practitioner-led consultancy with extensive first-hand experience, we are in position to offer expert help and advice.  For example, we have consultants who have worked in the development of the Middle Offices of some of the largest Investment Banks.  Their experience in being the primary point of contact, the guardian of data and distributors of key information is extremely valuable in helping define new operating models.  Additionally, our consultants are well versed on the topic of settlement risk in FX and we help our clients understand the benefits of netting, payment-versus-payment and of schemes such as CLS.

Finally, as part as our Managed Services offering, ConnexCity leverages the skills and expertise of former City professionals who are based within the London commuter belt.  The ConnexCity workforce is well versed in dealing with remediation cases for KYC or AML, amongst other business areas.

For further information on how New Link Consulting can assist your organisation on understanding the FX Global Code, please use out contact page.