Adopt FX code or face regulation, warn central bankers

Global code of conduct must be adopted, Schiavi and Debelle insist

Roberto Schiavi, ECB

Foreign exchange market participants must adopt and abide by the new global code of conduct when it is published or the industry could face regulators stepping in to end the principle-based nature of the market, warned two central bankers at the 14th annual FX Week Europe conference in London on November 25.

The global code of conduct is expected to number 50 pages when published – a mammoth task, according to a source close to the matter, as the document will cover all aspects of trading and there is a push to publish a draft in March 2016, instead of May as originally planned.

Roberto Schiavi, the European Central Bank's (ECB) deputy director general of market operations and chairman of its forex contact group, told conference delegates that market participants must heed the new principles and continue building on the work already done since last November to avoid prescriptive regulation.

"Change of behaviour in the industry is needed and I'm convinced it will contribute to a better forex market. Those recommendations are, however, not explicitly built-in regulation. I would therefore like to make one final point clear and I'm not the first one, as a central banker, to say it. If these recommendations are not implemented there is a higher likelihood of regulatory response," he said.

Schiavi stressed that central banks, whose forex committees are working jointly on the new rules – the final version is due to be published in May 2017 – are not regulators, but said their role was to come up with principles that placed a "capital importance" on ethics.

Change of behaviour in the industry is needed and I'm convinced it will contribute to a better FX market

"Central banks participate in forex, just like you," he told delegates. "There are tangible examples of central banks moving towards a better forex market, because it's an integral part in the transmission of monetary policy."

Last chance saloon

In a separate speech, Guy Debelle, assistant governor of the Reserve Bank of Australia, and chairman of the Bank for International Settlements' (BIS) markets committee and foreign exchange working group, also stressed the global code is the last chance for the industry if it wants to avoid rigid regulation.

All market participants will be expected to adhere to the code, he said, regardless of whether they are platforms, banks, central banks or members of the buy side. The code will also cover non-bank market-makers, a number of which were invited recently to join in the work.

"This is not a code of conduct for the sell side – it's a code that will apply to all market participants," Debelle said. "If it doesn't, it's quite likely some other solution, which is probably nowhere near as desirable, will get imposed on the market."

Both Schiavi and Debelle highlighted the high level of co-operation between central bank forex committees, and noted the importance of input from private-sector players.

"Co-operation on an international level has been very intense, which gives us a solid platform for our work," Schiavi said.

"This is very much in all of our interests to have a well-functioning foreign exchange market," added Debelle.

The code will build on the eight-page Global Preamble, published in March, as well as various regional conduct rules operated by central banks, such as the non-investment products (Nips) code in the UK and the Model Code of the ACI, with the aim of converging various rules into a principle-based, global document. In May, the BIS was appointed to co-ordinate the project.

Plugging the gaps

At a BIS press briefing in September, Debelle said the new code will need to plug the gaps that exist as a result of there being numerous codes, and he identified six key areas requiring particular attention: issues over when it is appropriate to trade as principal or agent, handling stop losses, order handling, partial fills, time stamps and last look.

Schiavi, meanwhile, updated the audience on the progress on recommendations made in 2014 by the Financial Stability Board regarding forex benchmarks, highlighting the widening of the WM/Reuters window to five minutes in February this year, the need for providers to charge for benchmark order handling and the separation of benchmark orders from normal trading.

He also reiterated that the ECB's daily reference rate was not for transaction purposes and called for private-sector players to come up with alternative solutions. "The ECB daily rate is purely a reference rate. There are private vendors who are much better equipped to provide a tradeable benchmark," he said.

Debelle encouraged market participants to join the push towards better conduct: "It is in all our interests that trust be restored to the foreign exchange market and I very much trust that you, as market participants, will work constructively towards this important endeavour."

This article originally appeared on Risk.net's sister site FXWeek.com.