The FX Global Code 2021: What’s Changed?

In all, 11 Principles have been changed for the latest iteration of the FX Global Code, several of which have been flagged previously by the GFXC. Additionally, there have been illustrative examples added and, in the case of Principle 11, which looks at pre-hedging, an example deleted, and Principles 17 and 18 have had an example added.

The GFXC says that the P11 example was deleted because, upon review, the Working Group responsible thought it unclear and less than helpful. The P17 example was actually added two years ago and is therefore the formal adding of the example to the Code, while there additional P18 example reflects the growth in interest, and use, of DMA algos by clients.

Anonymous Trading

The GFXC says a key focus of the review has been a perennially difficult area, anonymous trading. The Code has been amended to encourage greater disclosure by those operating anonymous platforms, including of their policies for managing the tags of their users. Anonymous trading platforms are also being encouraged, again on a voluntary basis, to make available the Code-signatory status of their users, in order to promote transparency to the market.

Another alteration, one that recognises the value that data related to trading activity holds for market participants, the Code now states that multi-dealer platforms (including anonymous platforms) should be transparent about their market data policies, including which user types such data is made available to and at what frequency and latency. Platforms are also encouraged to disclose the mechanisms and controls by which they are managing or monitoring the credit limits of their users.

Settlement Risk

This is very much one of the less controversial areas of the Code re-write, thanks to the widespread acknowledgement of the gap risk that exists and the subsequent need to strengthen the guidance to encourage greater use of payment-versus-payment (PvP) mechanisms.

Amendments have been made to place greater emphasis on the usage of PvP mechanisms where they are available and to provide more detailed guidance on the management of settlement risk where PvP settlement is not used. New language on the potential systemic consequences of a market participants’ failure to meet their payment obligations has been included to specifically discourage ‘strategic fails’.

Algorithmic Trading

The Code’s guidance on the information that providers of algorithmic trading or aggregation services should be disclosing has been expanded to include the disclosure of any conflicts of interest that could impact the handling of client orders (such as those arising from interaction with their own principal market-making desk).

More broadly, the GFXC says it believes the market would benefit from greater uniformity of disclosures in this area. To enable clients to more easily compare and understand the services being offered, market participants providing algorithmic trading services are now encouraged to share their disclosure information in a standardised format, hence the publication of an Algo Due Diligence Template that market participants may use, as appropriate.

The GFXC says it also believes that transaction cost analysis (TCA) would be aided by greater harmonisation of data reporting within the industry. It says that TCA is central to determining the quality of execution received by users of algorithmic trading services. As the barriers to conducting TCA can be high, a standardised information set could be particularly helpful for less sophisticated clients or those with limited resources. The Transaction Cost Analysis Data Template should assist in bringing about greater standardisation, it adds.

Disclosures

The GFXC also set out to simplify and standardise the information clients receive to allow them to make more informed judgements about various service providers. To address this, the Committee has created standardised Disclosure Cover Sheets for Liquidity Providers and for FX platforms. The Code has also been expanded to include explicit references to the provision of information about trade rejections. Market participants should be making clients aware of the basis on which trades might be rejected, and should be keeping records of the reasons behind electronic trade rejections.

The following Principles and Illustrative Examples have been adjusted in the 2021 version of the FX Global Code, specific details of the changes can be found here. Principles 8, 9, 18, 19, 22, 29, 35, 36, 41, 50 and 53.

In the Illustrative Examples, one has been taken out from Principle 11, and others added to Principles 17, 18 and 22.