IAFEI Quarterly - 37th Issue

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also as the exchange rate is an important channel of
monetary policy transmission. In a globalised world, the
foreign exchange market is one of the most vital parts of
the financial plumbing.
One of the guiding principles that has underpinned our
work in developing the Code is that the Code should
promote a robust, fair, liquid, open and transparent
market. A diverse set of buyers and sellers, supported
by resilient infrastructure, should be able to confidently
and effectively transact at competitive prices that reflect
available market information and in a manner that
conforms to acceptable standards of behaviour. Note
that I am talking about all sections of the FX market:
buyers, sellers and infrastructure.
The work to develop the Code began two years ago,
in May 2015, when the BIS Governors commissioned
a working group of the Markets Committee of the BIS
(which I chaired until early January this year) to do two
things: first, establish a single global code of conduct for
the wholesale FX market and second, to come up with
mechanisms to promote greater adherence to the Code.2
This work was very much a public sector–private sector
partnership. We were ably and vigorously supported by
a group of market participants, chaired by David Puth,
CEO of CLS. David’s group contained people from all
around the world on the buy side, including corporates
and asset managers, and the sell side, along with trading
platforms, ECNs and non-bank participants, drawing
from the various Foreign Exchange Committees (FXCs)
and beyond. All parts of the market were involved in the
drafting of the Code to make sure all perspectives were
heard and appropriately reflected.
There are two important points worth highlighting: first,
it’s a single code for the whole industry and second, it’s
a global code.
On the first point, the Code supplants the existing codes
that have been present in the FX market. So there is
now one single code. Importantly, the Code covers all of
the wholesale FX industry. This is not a code for just the
sell side. It is there for the sell side, the buy side, non-
bank participants and the platforms; it reaches around
the globe and across the whole industry. The way it is
relevant will depend on the nature of the engagement
with the FX market. What this means in practice is that
the steps different market participants take to align
their activities with the principles of the Code will differ,
reflecting the size, complexity, type and extent of their
engagement with the FX market.
2 See
On the second point, it’s a global code: our group
contained representatives from the central bank and
private sector fromall the 16 largest FX centres, including
both developed and emerging markets.
The first phase of the Code was released in May 2016.
It covered areas such as ethics, information sharing,
aspects of execution and confirmation and settlement.
The second phase covered further aspects of execution
including e-trading and platforms, prime brokerage,
as well as governance, and risk management and
compliance.
The complete Code comprises 55 principles spanning
these issues. The principles are written in plain language
and should be easily read and understood by market
participants. The principles are supplemented by a suite
of examples to illustrate their practical application.
Market participants had a number of opportunities to
comment on the Code, in addition to the direct input of
the Market Participants Group. Before its release, drafts
of the full text of the Code were distributed to market
participants for their review, principally through the
various FXCs, but also through other industry associations
to ensure all perspectives were appropriately reflected in
the Code. Through this process, over 10,000 comments
were received.
The Code reflects our collective judgement as to what
constitutes good practice in the market, taking account
of the feedback received. I think it is a good outcome
of the process that we were able to distil the points of
contention down to a small number of issues. Outside of
these, the feedback reflected a widely held consensus
as to what is good practice. The degree of consensus
and the willingness to contribute to the process reflect
the fact that market participants have recognised the
Code’s aim of helping move the FX market to a better
place.
One of our central aims in drafting the Code is for it to
be principles-based rather than rules- based. There
are a number of reasons why this is so but, for me, an
important reason is that the more prescriptive the
Code is, the easier it is to get around. Rules are easier
to arbitrage than principles. The more prescriptive and
the 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.
But we have not written a procedures manual. Rather,
we have articulated principles that need to be taken into
account. Individual firms may then take these principles