BoE’s Lintern Warns About Code Adherence, Settlement Risks

The Bank of England’s head of foreign exchange says trading venues and market participants that haven’t signed up to the FX Global Code, or chose to remain unengaged, have “hard questions” to answer, hinting at growing pressure from authorities to get the FX market in line with global standards.

Despite launching in 2017 and garnering quick support from the sell side, of the entities that have signed, 62% are banks but only 10% represent the buy-side and just 3% are e-trading venues. “This uneven uptake raises questions about having a level playing field and risks the trust in our market which was so hard to rebuild after the 2013 scandal,” Philippe Lintern said on December 3. “There are many hedge funds that are large, sophisticated participants in the FX market, and yet virtually none have signed up to the Code. Why not? Likewise, there are hard questions to be asked of trading venues that choose not to adopt the Code or seek to remain unregulated.”

The warning to platforms comes amid shifting expectations from regulators in the UK and Europe as both want trading venues that offer non-spot products to register as MTFs or OTFs. The so-called trading perimeter outline from the FCA was published in October last year and it spurred platforms to review their operations and decide whether they need to undertake the onerous regulatory registration process.

Settlement Risk Remains High

Lintern also called on market participants to review their settlement processes and make improvements if necessary. He said between 10 to 15% of trades by value are settled on a gross bilateral basis without any risk mitigation, according to recent estimates, which given the size of the market adds up to “material risk.”

“In 2023, the failure of a mid-sized US bank which did not use PvP brought this risk into sharp relief,” he added.

Lintern said that if front-offices can be compared to Formula One teams using the most advanced technology possible, back-offices are left riding rusty bikes struggling to keep up. “The knock-on impact on FX settlement risk is all too obvious,” he said.

Settlement risk has been on the radar of authorities for years, as the share of CLS-settled deals has shrunk relative to the overall market, particularly in the fast-growing emerging market universe. Central banks, including the BoE and the Bank for International Settlements, have compiled a new survey for measuring settlement risk in FX markets, which will be deployed during the 2025 Triennial Survey.

Settlement has also been in the spotlight because of the move to T+1 in US equities, which the EU and the UK are set to follow in 2027. This is further pressuring back offices, Lintern said, noting that the latest revision to the FX Code urges companies to carry out regular reviews of their FX settlement practises. “A common issue is that counterparties agree settlement methods when they establish a trading relationship and never revisit those decisions. That needs to change,” he said.