IAFEI Quarterly - 37th Issue

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and reflect them in their own procedures manuals. Our
aim in setting out these principles is to provide market
participants with the framework in which to think about
how they, for example, handle stop-loss orders. The
emphasis here is very much on the word ‘think’.
Adherence
Alongside drafting the Code, we devoted considerable
time and effort to thinking about how to ensure
widespread adoption of the Code by market participants.
Clearly, that was an issue with the various existing
codes that had been in place in a number of markets.
It is evident they were ignored on occasion in the past,
wilfully or otherwise.
We have worked with the industry to produce a
principles-based code rather than a set of prescriptive
regulatory standards. The Code is not regulation. It will
not impose legal or regulatory obligations on market
participants, nor will it supplant existing regulatory
standards or expectations.
We have developed a blueprint for adherence that has
been published alongside the Code and sets out the key
elements we think will be required for the Code to be
successful – and the steps that have been taken, and will
be taken, to ensure this is the case.3
One critical dimension is market-based adherence
mechanisms. An important element of discipline
should come from the market itself. The adherence to a
voluntary code will only come about if firms judge it to
be in their interest and take the practical steps to ensure
the Code is embedded in their practices. Such practical
steps would include training their staff and putting in
appropriate policies and procedures.
We have provided a draft Statement of Commitment
for firms to publicly demonstrate their adherence to the
Code.4 One reason for a public demonstration is that firms
are more likely to adhere to the Code if they believe that
their peers are doing so too. That is, an important source
of pressure to adhere should come from other market
participants. To provide visibility around this, there are
a number of market-based initiatives to provide public
registries where market participants can demonstrate
their use of the Statement of Commitment. These
registries will be in the public domain in the near future.
More broadly, market participants have a vital interest,
and a role to play, in promoting and upholding good
practices in the market as a whole.5 This can be
3
4 The Statement of Commitment is in Annex 3 of the Code
5 The Banking and Finance Oath has a very similar motivation
partly achieved through leading by example, but can
also be supported by having similar expectations of
counterparties and other
market participants and helping to raise awareness of
the Code in their market interactions. In that regard, we
have reached out to more than 120 industry associations
and key market infrastructure providers globally. In
Australia, that includes AFMA and the Finance and
Treasury Association, as well as the NZFMA.
Ultimately the success of the Code in promoting integrity
and restoring confidence in the wholesale FX market lies
in the hands of its participants.
Another aspect of market-based adherence comes
through the FXCs. In due course, adherence to the Code
is likely to become a requirement of FXC membership.
In Australia’s case, adherence to the Code will be a
requirement of membership of the Australian foreign
exchange committee by the end of this year. That would
ensure the Code is embedded at the core of the FX
market, given the extent of coverage of the FXCs. But it
is also important that it extends beyond that, and that
there is, at the very least, an awareness of it across all
market participants.
A second dimension of adherence is that the BIS central
banks have signalled their commitment by announcing
that they themselves will follow the Code, and that they
expect that their counterparties will do so too.6 In the
case of the RBA, we will require that our counterparties
sign
the Statement of Commitment, just as we will ourselves.
Given that we provided the full text of the Code to the
market only last month, 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.
I would not expect much time should be required to
do this. This period of time might potentially be as
short as six months, but no more than twelve months
for the vast majority of market participants. How much
effort this might require will in part depend on the
nature and extent of engagement with the FX market. In
drafting the Code, we have always kept the principle of
proportionality at front of mind.
Finally, it is vital that the Code remains up to date
and evolves as the market evolves. The Code will be
collectively owned, maintained and updated by the
Global Foreign Exchange Committee (GFXC), which met
for the first time in London in May. This will continue
the public sector – private sector partnership which has
supported the development of the Code.
6 See