Forex code cold shouldered; Volcker fires up FRTB; Tradeweb trends

The week on, November 30–December 6, 2019

7 days montage 061219

Buy side still not adopting global forex code – Debelle

Forex committee wants asset managers to embrace standards; shifts focus to algo trading

Final Volcker rule fires up rethink on FRTB trading desks

Regulators encourage structural alignment between the two rules, but hurdles remain

Tradeweb’s IPO shows how OTC markets are changing

RFQ pioneer is embracing new protocols and liquidity providers in a bid to connect the OTC markets


COMMENTARY: Cracking the code

Many in the foreign exchange industry have been saying for some time that more buy-side firms should sign up to the 2017 Global Code of Conduct, formulated in the wake of fixing scandals that fostered mistrust between clients and liquidity providers.

A few on the sell side are already going the extra mile, using quantitative methods to confirm that activities done in their names align with the standards-based document.

But the buy side is lagging in the race to adopt the 55 principles. As it stands, just 80 buy-siders have added their names – among more than 900 sell-side signatories. They may feel they don’t have the internal resources to ensure ongoing compliance. Perhaps they perceive that only a portion of the principles apply to them. And some decry it as a “box-ticking exercise”.

Now, the Global Foreign Exchange Committee (GFXC), comprising central banks and private sector participants that oversee the code – led by Guy Debelle, deputy governor of the Reserve Bank of Australia – has amplified calls for the buy side to get on board with the standards.

Debelle said this week: “It’s clear that work needs to be done to get greater adherence to the code among the buy side.” A review of the code next year will address guidance on algorithmic trading, anonymous trading, disclosures and execution principles including ‘last look’, he added.

The milliseconds-long last-look window opens once a client order has been received. Dealers can refuse the trade at this point, and it has been a lightning rod for criticism. In the past, dealers used it to pre-hedge client orders – a practice that can be indistinguishable from front-running. The code frowns on pre-hedging and many dealers now rule it out, but other practices vary – including the length of the window – and the quality of disclosures.

Asset manager Insight Investment has urged buy-side firms not to take on trust disclosures made by forex dealers – and to “team up” in an attempt to extract more useful information.

That stance has in the past proved warranted. found in August that while most firms adhere to the code, a quarter lack public disclosures on their last look practices and more than half refused to state their approach to hold times. Non-banks were also revealed to have patchy disclosures.

What can happen in practice is that orders may be routed by agency execution algorithms to liquidity providers with unknown last look practices, while users of anonymous electronic communications networks find it difficult to ascertain the last look policies of their counterparties. The renewed focus on last look has therefore led to calls for more transparency to be applied to the practice.

In July, Debelle also warned currency market participants that hiding behind ‘buyer beware’ disclosures stating customers are ultimately responsible for making poor decisions is not an excuse for bad conduct.

The issue of standardising disclosures is being raised at high levels. At a meeting of the Bank of England’s Foreign Exchange Joint Standing Committee in May, attendees, including fund manager Schroders, observed that the current jumble of so-called reject codes used by dealers might not be useful in explaining why a client order has been declined. Reject codes are sent to a client following a rejection, but each bank has its own set.

Later in November, the Investment Association, representing UK asset managers, said that while some improvements have been made with regards to transparency during the last look window, investors still feel it’s often unclear whether a trade has been rejected due to risk-control checks or for another reason.

At the same time, the ACI Financial Markets Association – a group representing the professional financial markets community – recommended a methodology be developed to describe last look, saying it is an area in which the industry could work together to come up with a glossary of terms to define the practice.

Trade cost experts, meanwhile, have warned that some less sophisticated buy siders may struggle to determine best execution in forex trades at a sub-second level, partly because of the plethora of timestamps used in electronic communications. Fix Trading Community – the body that governs the messaging standard – has floated the idea of an industry-wide effort to standardise the treatment of timestamps.

As the GFXC pointed out last week, adopting the code has seen a clear improvement in forex market conduct. Its review of the code and focus on encouraging better buy side participation is therefore to be welcomed, as more needs to be done. Industry collaboration will be key.


South Korea’s structured products market faces disruption over a mooted rule change that could slash volumes of equity autocallables by 30–40%, as rumours circulate that regulators are planning to ban the sale of autocallables in trust format and force issuers to repackage the instruments as funds, following a mis-selling scandal that caused heavy losses for retail investors in rates-linked products.


“Trying to drive innovation only from inside an organisation hasn’t been very successful at having a transformational impact – we have to do it both in and outside the bank in the same time” – Alex Manson, head of SC Ventures, a business unit of Standard Chartered, on the need to experiment with new ways of working through an independent entity. A drove of virtual banks is preparing to launch across Asia and established lenders want to exploit their potential as a test bed for innovative risk management practices.

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