The Last Look…
Posted by Colin Lambert. Last updated: January 28, 2025
The latest iteration of the FX Global Code contains some important, but nuanced, changes, and as well as highlighting how the Global FX Committee is adhering to the original intent for it to be a slowly-evolving document, it also allows the GFXC to focus in on some pressing issues still facing the FX industry.
There have been rumblings in the FX industry about the Code becoming too proscriptive, but it is heartening to see the GFXC has taken this on board and softened the language around some of its changes. Notably, it has stressed how the data disclosure recommendations are not aimed at preventing data usage, more about highlighting where the data goes to third parties.
I still find it a little ironic that some on the buy side are concerned about how their data is used by third parties, it is clear that these are TCA and analytical firms – which leaves me wondering, are those concerned in the (still too large) camp that doesn’t bother with serious TCA for its FX business? If it is users of TCA services that are worried, it would be fascinating to know why? They’re the ones using the service provided, and a big part of that is peer analysis surely?
On settlement risk, the GFXC has also stepped back from imposing too-restrictive recommendations, which is probably more important. I have written before, that while PvP and netting are the most useful settlement risk mitigation tools, we should not be shutting the door on other solutions that are evolving in front of our eyes – some participants would be delighted to gross settle in a much shorter time-span and this has been recognised in the updated Code (whilst still stressing the primacy of PvP).
I remain a little concerned over how the changes to Principle 10 will play out, and this highlights the challenge facing the GFXC in evolving the Code. On one hand I feel that the re-write could have been harder on timestamps – it is hard to believe that some custodians are still struggling to provide accurate timestamps, but apparently they are – but on the other I recognise the complexity around delivering this for very large trades or in very illiquid markets.
I am also a little worried that the new language around disclosure of Principal-initiated orders is also driving the market into a corner. Absolutely, it is important to provide high-level disclosures around factors affecting execution, but the fact is that different orders will be executed in different fashions. A small EUR/USD order is different to a large Cable order, which is different to a regular order in, for example SEK/KRW (which of course, everyone should be buying…)
My concern is that trying to account for all the different decisions, around different amounts, in different pairs will make the disclosure documents resemble the Ts&Cs at the end of an investment email – in other words something people never read, but which may come back to bite them on the backside.
The entire premise of a code of conduct is best efforts to do the right thing – it is more about how someone goes about their business than what the outcomes are, and this is the case here. I was surprised to see the supply of a reference rate landing at the feet of executing parties – surely this is why we have third-party, independent, TCA firms? Perhaps, if too many on the buy side are unwilling to engage a TCA provider to actually help them improve, then we need a utility that publishes rates across the thousands of pairs, throughout the day? This sounds like a benchmark provider to me and newsflash for the buy-side – this also costs money, it’s just you rarely pay it!
New LPs may be sitting at top-of-book and winning more business, if they are then it would be good to see their Statement of Commitment
On the subject of the buy side, I suspect that 2025 will be the year the GFXC really tries to get the hedge funds on side. Those asset managers that care about their FX costs are largely signed up thanks to the proportionality tool, the rest clearly don’t care enough so should we waste more time chasing them? We probably should, but it would also be good to get deeper penetration into the hedge fund world.
We report elsewhere in this newsletter about the stellar year currency managers had in 2024, which is something that may attract more funds to the market (and bring some familiar names back), but if that is the case, the industry should be waiting with a copy of the Code for these firms to sign.
Personally, being a little cynical about this, I think there are two hopes of succeeding here, Bob and No, but that doesn’t mean the industry shouldn’t try – if for no other reason than the LPs will not have to approach different client segments in different fashions when it comes to surveillance (and I am not advocating poor practice towards non-adherent firms, merely observing that the different reporting from oversight sounds like a nightmare!).
Of course, this is already the case to a degree, but if hedge funds and CTAs do come back to the FX market in size, it will be a bigger issue.
One final area for the GFXC to focus its efforts – and it’s not on the buy-side. I wrote recently about higher reject rates on some platforms and suggested at least part of the reason could be new LPs. These firms may be sitting at top-of-book and winning more business, if they are then it would be good to see their Statement of Commitment – one way to help raise conduct standards is to have a level playing field amongst providers.
Overall, I think the updated Code sticks to the original ethos of its founders, incremental shifts – and I think that including links to the ‘further guidance’ papers is a half-step forward. We should not kid ourselves that problems and risks no longer exist – they do, and some, like pre-hedging and asymmetric hold times, are familiar, but I think we are seeing the benefits of the three-year review process play out – which hopefully means even more participants will engage next time around.