The new FX Global Code applicable to wholesale FX trading

The FX Global Code has been published in and is applicable from May 2017 and provides a set of global principles of good practice in the foreign exchange market (Global Code). It has been developed in a partnership between central banks and market participants from 16 jurisdictions around the globe.

The Global Code is so-called “soft law” and thus non-binding law. Why should market participants care? The Global Code is the new global standard for doing business in FX markets. It is being backed by multiple regulators such as the FCA and FINMA. They all have expressed their wish that the Global Code should become the new minimum standard of doing business in the FX wholesale market. It is likely that courts will contemplate it when interpreting contractual or regulatory provisions. Market participants that do not comply with the Global Code will have fewer counterparties to trade with.

 Who is affected by the Global Code?

The Global Code applies to anyone active in the FX markets as a regular part of its business that:

  • is engaged in the purchase/sale of one currency against another, transactions designed to create gains or losses due to the change in FX rates, including derivatives, whether deliverable or non-deliverable, either directly or indirectly through market participants; or
  • operates a facility, system, platform or organization through which participants have the ability to execute the transactions mentioned above; and
  • is not considered a retail investor in Switzerland

The affected Market Participants are thus a wide array of different players, such as financial institutions, asset managers, hedge funds, pension funds, insurance companies, corporate treasury departments, family offices with treasury operations, non-bank liquidity providers, firms running automated trading strategies, brokers, E-trading platforms, and the remittance business in the wholesale market.

Pure pricing display platforms, remittance business in the retail market, private banking customers trading as individuals or via personal investment vehicles, and the general retail public remain unaffected.

What is regulated in the Global Code?

The Global Code contains content about the following key principles and sub-principles:

  • Ethics: Market Participants are expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX Market.
    • Market Participants should strive for the highest ethical and professional standards as well as identifying and addressing conflicts of interests.
  • Governance: Market Participants are expected to have a sound and effective governance framework to provide for clear responsibility for and comprehensive oversight of their FX market activity and to promote responsible engagement in the FX market. Market Participants should thus:
    • Put in place adequate and effective structures and mechanisms to provide for appropriate oversight, supervision and controls with regard to FX Market activity.
    • Embed a strong culture of ethical and professional conduct with regard to their FX Market activities.
    • Have remuneration and promotion structures that promote market practices and behaviours that are consistent with the Market Participant’s ethical and professional conduct expectations.
    • Have appropriate policies and procedures to handle and respond to potentially improper practices and behaviours effectively.
  • Execution: Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid and appropriately transparent FX Market. This means that Market Participants have to:
    • Become clear about the capacities in which they act.
    • Handle orders fairly and with transparency in line with the capacities in which they act.
    • Handle orders fairly, with transparency, and in a manner consistent with the specific considerations relevant to different order types.
    • Only pre-hedge client orders when acting as a principal, and should do so fairly and with transparency.
    • Not request transactions, create orders or provide prices with the intent of disrupting market functioning or hindering the price discovery process.
    • Understand how reference prices, including highs and lows, are established in connection with their transactions and/or orders.
    • Ensure that the mark up applied to client transactions by Market Participants acting as principals should be fair and reasonable.
    • Identify and resolve trade discrepancies as soon as practicable to contribute to a well-functioning FX Market.
    • Ensure that Market Participants acting as voice brokers should only employ name switching where there is sufficient credit between parties to the transaction.
    • In case of a last look, ensure that it is transparent regarding its use and provide appropriate disclosures to clients.
    • Ensure that Market Participants providing algorithmic trading or aggregation to clients should provide adequate disclosure regarding how they operate.
  • Information sharing: Market Participants are expected to be clear and accurate in their communications and to protect confidential information to promote effective communication that supports a robust, fair, open, liquid and appropriately transparent FX Market. Market Participants have to:
    • Clearly and efficiently identify and appropriately limit access to confidential information.
    • Not disclose confidential information to external parties, except under specific circumstances.
    • Communicate in a manner that is clear, accurate, professional and not misleading.
    • Communicate market colour appropriately and without compromising confidential information.
    • Provide personnel with clear guidance on approved modes and channels of communication.
  • Risk management and compliance: Market Participants are expected to promote and maintain robust control and an environment of compliance to effectively identify, manage and report on the risks associated with their engagement in the FX Market. This means that Market Participants should:
    • Have frameworks for risk management and compliance.
    • Familiarize themselves with, and abide by, all applicable law and standards that are relevant to FX Market activities and have an appropriate compliance framework in place.
    • Maintain an appropriate risk management framework with systems and internal controls to identify and manage the FX risks they face.
    • Have practices in place to limit, monitor and control risks related to their FX market trading activity.
    • Have a process in place to independently review the effectiveness of and adherence to risk management and compliance functions.
    • Have adequate processes to manage counterparty credit risk exposure, including, where appropriate, through the use of appropriate netting and collateral arrangements, such as legally enforceable master netting agreements and credit support arrangements.
    • Have processes to measure, monitor, report and manage market risk in an accurate and timely way.
    • Have independent processes in place for mark-to-market trading positions to measure the size of their profit and loss and the market risk arising from trading positions.
    • Have appropriate processes in place to identify and manage operational risks that may arise from human error, inadequate or failed systems or processes, or external events.
    • Have adequate business continuity plans in place that are appropriate to the nature, scale and complexity of the FX business.
    • Have processes in place to address potential adverse outcomes arising from the use or reliance on technological systems.
    • Have prudent measures to manage and reduce their settlement risk.
    • Keep a timely, consistent and accurate record of their market activity to facilitate appropriate levels of transparency and auditability and have processes in place designed to prevent unauthorized transactions.
    • Perform “know-your-customer” (KYC) checks on their counterparties against money laundering, terrorist financing, or other criminal activities.
    • Have reasonable policies and procedures ensuring that trading access is limited to authorized personnel only.
    • Generate a timely and accurate record of transactions undertaken to enable effective monitoring and auditability.
    • Have processes in place to identify and manage legal risks arising in relation to their FX Market activity.
    • Strive to monitor and control trading permissions and credit provisions in real time.
  • Confirmation and settlement process: Market Participants are expected to put in place robust, efficient, transparent, and risk-mitigating post-trade processes to promote the predictable, smooth, and timely settlement of transactions in the FX Market. This means in particular:
    • The establishment of consistency between operating practices, their documentation, and policies for managing credit and legal risks.
    • A robust framework for monitoring and managing capacity in both normal and peak conditions.
    • The implementation of straight-through automatic transmission of trade data from their front office systems to their operation systems.
    • Conducting any updates, amendments and/or cancellations of transactions in a controlled manner.
    • Confirming trades as soon as practicable and in a secure and efficient manner.
    • Reviewing, affirming, and allocating block transactions as soon as practicable.
    • Identifying and resolving confirmation and settlement discrepancies as soon as practicable.
    • Being aware of particular confirmation and processing features specific to life cycle events of each FX product.
    • Measuring and monitoring settlement risk and seeking to mitigate that risk when possible.
    • Utilizing standing settlement instructions.
    • Requesting direct payments.
    • Having adequate systems in place to allow them to project, monitor and manage their intraday and end-of-day funding requirements to reduce potential complications during the settlement process.
    • Performing timely account reconciliation processes.
    • Identifying settlement discrepancies and submitting compensation claims in a timely manner.

Please get in contact for your free consultation:

Martin Liebi
Director
Tel: +41 58 792 2886
martin.liebi@ch.pwc.com

Published by

Martin Liebi

Dr. iur. Martin Liebi LL.M., attorney-at-law, CAIA, advises on and implements as Head Capital Markets within Pricewaterhouse Coopers Ltd. Legal FS Regulatory & Compliance Services practice, a wide array of regulatory change management programs.

Martin Liebi has more than 14 years experience with leading Swiss and US law firms in the areas of capital market law, banking law (private banking, asset management, and investment banking), financial market regulation, securities law, corporate law, M&A, and general commercial law.

He has been head legal with a Swiss Private Bank and head compliance with a Swiss Fund-of-Hedge Funds. He has studied law at Stanford University (LL.M.), the University of Zurich (Dr.iur.), the University of Fribourg (Lic.iur.), and Leiden University (LLC). He holds also a Management Degree from Harvard University.

He serves as judge at the commercial court of Zurich and is a lecturer at the University of Zurich’s LL.M. program in Banking & Finance (Regulation of European Capital Markets as well as Regulation of Banks and Securities Dealers). Martin Liebi publishes and holds talks regularly about current topics in financial markets law.