Patience the Path for GFXC Over Pre-Hedging

While it continues its work to build adherence, buy side adoption and reducing settlement risk, the Global Foreign Exchange Committee (GFXC) is taking a patient approach on the tricky subject of pre-hedging.

Speaking to The Full FX after what he says was a “very productive” meeting in Frankfurt on 1-2 July, GFXC chair Gerardo García, general director of market operations at Banco de México, says that the discussion on pre-hedging was focused on whether to include a link to the guidance paper – and that on last look – in the FX Global Code, thus keeping it outside the formal Code. “We have a softer approach because we are also awaiting the results of studies from other bodies,” he explains, observing that the Financial Markets Standards Board (FMSB) and IOSCO are conducting research into the practice. “Those results will provide important inputs for the GFXC in guiding our approach going forward in terms of pre-hedging.

“This means the discussion was more about giving visibility to what the GFXC has been doing in terms of pre-hedging and last look, by including the link, and stressing that the guidance papers remain outside of the Code and not what institutions are signing up to when they sign a Statement of Commitment,” he adds.

Data, Buy Side, Settlement Risk Work Continues

The GFXC is also increasing its attention on the impact of new technologies and their influence on transparency more generally in FX markets. García says end clients are increasingly inquisitive about how their data is used and how the risk they generate from their trades is transmitted to the market. “There is a lot more focus in the FX market generally on how data is used,” Stuart Simmons, recently-appointed vice-chair of the GFXC, explains. “We discussed the benefits of creating more visibility on all platforms, both single and multi-dealer, so that clients can understand how their data is used and how their orders are handled.”

Intriguingly, Simmons also says the GFXC discussed whether a client has a right of refusal to have their data used by a platform, although it was merely a discussion point and at this stage is only part of the broader work on data transparency. This includes looking at data around fees and commissions and post-trade transparency more generally.

While García says feedback from local FX committees indicates that the changeover to T+1 in FX markets went smoothly, Stephane Malrait, member of the GFXC, observes that the change has increased the focus on outsourced execution and that “transparency in these arrangements is also an important factor”.

Elsewhere, García says the buy side outreach programme is “progressing well”, he mentions Hong Kong as seeing a good uptick in signatories from this segment of the market, although there are still segments of that community that remain unaware of the Code and its benefits. Noting that the sell side has reached “saturation point” in terms of Code adoption, Simmons adds there were “encouraging stories” from local FX committees about adoption and awareness. “While adoption is naturally slowing down, the proportion of new adherence to the Code from the buy side is increasing, and that is a positive metric,” he says. “We will continue to promote the proportionality tool to help the buy side understand what principles apply to them and how they can adhere to the Code.”

The work on settlement risk also continues, García says the meeting discussed strengthening the language in the Code to help promote wider use of payment-versus-payment (PvP) FX settlement. “We are taking a multi-layered approach to reducing settlement risk,” he says. “Technology, and how it can be used to reduce settlement times, is one part of that process.”

Overall, the message from the GFXC is that the Code remains fit for purpose and that any changes to the Code will be nuanced – a major re-write is not on the agenda. Work continues to build awareness and adherence, as highlighted by García’s thoughts on one change from the previous review of the Code – disclosure cover sheets.

“The disclosure cover sheets are working but we not there yet,” he observes. “One thing we have found from the survey is a lack of knowledge on the part of a section of the buy side about the disclosure cover letters, so we need to step up our efforts to help the buy side understand what the benefits of those cover sheets are.

“Overall the message from the GFXC is that the disclosure cover sheets have been doing very well, but there is work to do in terms of other people asking for them and using them so they can benefit from knowing how they are transacting with their counterparties,” he concludes.