The Last Look…

Very quietly, the FX Global Code turned five last week. I remember being in New York for a Profit & Lossconference at which Guy Debelle and David Puth, the two leaders of the work to create the Code, dashed from a press conference that formally announced the launch, to share a platform with me to discuss some of the details – from the world’s press to me, that’s a shift in focus! Five years on, though, how effective has the Code been?

With well over a thousand statements of commitment issued the easy answer would be ‘very’, but that – as is often the case in this business – is over-simplifying matters. A new leadership team is in place and it faces challenges much as that first duo did – which suggests more work still needs to be done.

From a glass half-full perspective, it has to be argued that the Code has been a success when it comes to what was the low-hanging fruit, information sharing and security. Other practices were formalised in the guidelines as well, and the GFXC was well-placed thanks to the Code, to respond to the issues raised by the BIS in 2019 over settlement risk.

It also has to be said – and whisper this – that it has been a success in dealing with last look. Whilst I think zero additional hold time is over-simplifying the matter – I believe there should be a more sophisticated approach to the issue – it cannot be denied that awareness of long hold times and the use of last look generally has been heightened thanks to the work of – and debates upon – the GFXC as well as the changes to the Code.

More generally, there is an awareness in FX circles that conduct does matter – don’t be fooled by the ongoing lawsuits, they largely relate to events pre-Code and is more a factor of legal process meandering its (painfully slow) way to a conclusion rather than evidence that behaviour is still questionable. Of course, it should be pointed out that there are still questions over some activity – sadly that will forever be the way, but the bottom line is nobody can be surprised if they are called out for poor conduct.

Which brings me to the buy side. There is a tendency to say that the Code has been a failure in that it has not engaged with the buy side. There have been a series of calls over the years for more to be done about this, but what is forgotten is that the GFXC has indeed tried multiple initiatives – it’s just they haven’t had stellar results.

Signing up to the Code means you take responsibility as a firm for not only your conduct, but also for checking up on your counterparts’ behaviour. If the latter refuse to share data then it could be argued they are in breach of the Code. If, however, they share it and it is ignored, whose fault is that?

That said, I feel the numbers are skewed due to the inordinate amount of multiple signatories at certain banking groups. I would estimate that in the banking world, rather than the 850-900 signatories suggested by the headline numbers, the actual number of institutions (in ownership terms) is less than half that. I had a quick scout through the GFXC website and estimate there is something like 130 buy side firms as I identify them, signed up (there are a couple of multiply signatories I discounted here as well).

This means that in reality, and in “ownership” terms, the number of buy side signatories is about one-third that of banks (I haven’t included central banks, non-banks – or platforms for that matter – in these calculations). Compared to the amount of volume generated from each sector I would argue that this is a fair reflection of the FX market – in the 2019 BIS survey, institutional investors, hedge funds and prop traders, as well as non-financial customers, accounted for just over 27% of all FX flow.

It could be argued, therefore, that the Code accurately reflects the make-up of the market in its signatories…if it wasn’t for one thing – and this is my glass half-empty view.

I struggle to find what I would identify as a hedge fund amongst the signatories to the Code. This is the glaring “miss” when it comes to judging the Code over its first five years. I am not sure what can be done about it, if anything – if these firms don’t think the Code applies to them there is little the industry can do about it. Equally, it has to be argued, some hedge funds’ behaviour over the years – especially around information sharing – would very much be against the spirit of the Code. Perhaps some won’t sign up because they do not want to be held to account?

The only way forward for the industry on this issue is to get a little punchier when it comes to those participants who refuse to sign up. Put simply, if you won’t sign up to the Code then you can’t complain if someone treats you unfairly through, for example, last look hold times. This doesn’t have to be about only hedge funds, asset managers who have ignored the Code could be subject to the same treatment. It is simply wrong to say these firms have not been told about the Code, most buy side associations have been aware of the work, and the public discourse around the Code has been hard to miss for any professional out there. For someone to say they are unaware of the Code five years signals either wilful negligence or a deliberate ignorance. In those circumstances should we care if these firms think they are hard done by?

Signing up to the Code means you take responsibility as a firm for not only your conduct, but also for checking up on your counterparts’ behaviour. If the latter refuse to share data then it could be argued they are in breach of the Code. If, however, they share it and it is ignored, whose fault is that?

Perhaps the true success of the first five years of the Code is how it has lived up to that “living, breathing” tag

I happen to believe that transparency levels in FX markets have improved thanks to the level of data available to check up on behaviour – much of it from independent third-party providers. That this is the case is partly due to the improvement in technology and data science, but it is also about the Code – and how it became the focal point for conduct in FX markets.

Another – and probably greater – achievement of the Code is how it has fulfilled  one of its ambitions at launch, when it was pronounced a living, breathing, document – one that would be monitored and changed as and when necessary. Through the first five years of its existence it has lived up to this billing as changes have been made and the industry has debated the pressing topics.

I also like how several firms are – thanks to encouragement from the GFXC and central banks – reaffirming their commitment to the Code on the back of last year’s changes. This reflects an industry on top of the issues it faces and with participants ready to adapt to, and promote, change.

More changes are necessary in my view, but it is churlish to argue they should be in place now – it takes time. What is pleasing is that thanks to reaffirmations and a true cross-participant commitee on which to debate the issues, change will occur.

So, perhaps the true success of the first five years of the Code is how it has lived up to that “living, breathing” tag? I certainly think that is more relevant than the number and make up of participants who have signed up.

Happy birthday.

colin@thefullfx.com

@colinlambertFX