GFXC Seeks Market Feedback for Code Update

The Global Foreign Exchange Committee (GFXC) is seeking industry feedback on proposals arising from its latest three‐year review of the FX Global Code. These proposals include both updates to the Code and the publication of templates that would be used by industry participants to improve disclosures and assist with transaction cost analysis. Respondents are asked to submit feedback before 7 May 2021.

The areas targeted for extended feedback – the proposals have already been discussed at local FX Committee (LFXC) level – are anonymous trading, algorithmic trading and transaction cost analysis, as well as disclosures and settlement risk. Changes to 10 of the Code’s fifty‐five principles are proposed, principles 9,18,19,22,29,35,36,41,50 and 53, there are also suggested amendments to the illustrative example regarding information sharing on anonymous e-trading platforms.

The GFXC is also seeking feedback on Disclosure Cover Sheets it has developed for both liquidity providers and FX venues. It says these would help market participants navigate what can be lengthy and complex disclosures documents, adding in doing so, they will facilitate the process of market participants making informed decisions about whom they engage with and how.

The use of disclosures templates is a potentially a big step forward for the GFXC and the Code, a point made by Neill Penney, co-chair of the committee. “For the first time the GFXC has said ‘it’s not enough that individual disclosures are as transparency and communicative as possible’. As a consumer of disclosures you can have 20 or more to look at, so some level of standardisation is important, so as a consumer you will now be getting what you have been seeking for a long time – the ability to compare what multiple providers are offering you and understanding the differences. That’s a massive step up, especially for the buy side.”

The Bank of England has been running a test of the disclosures with a group of LPs and liquidity consumers and Guy Debelle, chair of the GFXC, says the test was a success and proved the templates are broadly fit for purpose”. He adds, that if templates prove useful their use could be expanded further in the best practice document.

Templates to foster the provision of standardised information by providers of execution algorithms have also been published for comment. This includes a Transaction Cost Data Template to support analysis by users of algorithms and a FX Algo Due Diligence Template that would help assist in the disclosure of relevant information to users.

Proposed changes to the language of the Code are very much nuanced as has always been the intent of the review, rather than consist of a dramatic overhaul – that said, Debelle does acknowledge that the proposed adjustments are broader than was originally expected.

More clarity is recommended over the use of tags on anonymous platforms – the operators of which are being encouraged to disclose which tags represent participants who have signed a Statement of Commitment to the Code – and how these venues distribute market data.

On algos, the GFXC is encouraging providers and users to access the Algo Due Diligence Template, and recommends that providers ensure all pertinent information is made available for TCA purposes – again using the GFXC provided template.

Greater transparency on the reason for trade rejects is also recommended, market participants are also being encouraged to keep these records alongside those of trade requests and acceptances.

Perhaps the greatest changes are coming in what has become a key area of focus for the GFXC since the BIS highlighted it following the 2019 Triennial Survey of FX Turnover – settlement risk. The re-worded text on Principle 35, for example, strongly recommends the use of PvP (payment versus payment) mechanisms to mitigate settlement risk and also suggests that if a counterparty does not use PvP or netted settlement processes, then the market participant “should consider decreasing its exposure limit to the counterparty or creating incentives for the counterparty to modify its FX settlement methods”.

The language has also been strengthened on Principle 50, headlined by the statement that participants should “properly measure, monitor and control their settlement risk”. It adds, “To avoid underestimating the size and duration of exposures, Market Participants should recognise that Settlement Risk exposure to their counterparty begins when a payment order on the currency it sold can no longer be recalled or cancelled with certainty, which may be before the settlement date. Market Participants should also recognise that funds might not have been received until it is confirmed that the trade has settled with finality during the reconciliation process.”

Finally on the post-trade process, there is a proposal for a modest change in the language for Principle 53 around managing funding requirements appropriately.

“The proposed changes to the Code are targeted on the key focus areas that the GFXC identified from its earlier engagement with market participants,” says Guy Debelle, GFXC chair. “Many of the changes are designed to facilitate greater transparency via disclosure, and also to ensure that the information being provided is relevant and accessible to market participants. We have already consulted widely with the members of the local FXCs on the proposals developed by our global Working Groups. We are now looking for input from other industry participants.”

After considering the feedback received, the proposals will be finalised for approval by the GFXC at its June 2021 meeting, following a fatal flaw review by the local FXCs. The updated version of the Code will be published shortly after.

Flagging up a further industry consultation, the GFXC also says it is developing additional guidance material on the practices of last look and pre‐hedging. It says this guidance material is intended to promote wider knowledge and understanding of these practices and highlight how they relate to the Code’s existing principles for good practice in these areas. This material has also already had feedback from local FXCs and is being revised to take account of that feedback. Further feedback on this material will be sought from the broader industry in May, in addition to the local FXCs. “We separated this additional guidance from today’s releases because they don’t involve any real changes to the Code,” says Debelle. “That said, last look and pre-hedging are both a part of the disclosures template that we are releasing for consultation today, but the guidance papers are meant to be just that – guidance.”

Details of the proposed changes and on how to submit feedback can be found here on the GFXC’s website