EuroFinance

The foreign exchange (FX) market, inherently complex and global, operates 24/7 across multiple trading venues without a single price. It involves a diverse array of participants including banks, asset managers, corporates, and central banks, each with unique objectives and ways of market interaction​​. In such a multifaceted environment, the FX Global Code of Conduct (the Code) emerges as a vital set of principles designed to instil integrity, efficiency, and transparency in this market.

In EuroFinance’s conversation with Lisa Dukes, co-founder of risk management specialist, Dukes & King, the complexities and the vital role of the FX Global Code of Conduct in the foreign exchange (FX) market were brought to light. 

The Genesis and purpose of the FX Global Code

The FX Global Code, developed in response to the need for a unified set of guidelines in the FX market, was first published in 2017 and updated in 2021. This need became particularly apparent around 2012, in the wake of controversies like the LIBOR scandal. The Code was crafted through the collective efforts of the Bank of International Settlements, central banks, traders, industry associations, and other market participants. Its aim is to instil confidence and ensure fairness, efficiency, and transparency in the FX market. With the second revision of the Code scheduled for publication in 2024, it’s a pertinent time for treasurers to revisit and familiarise themselves with its guidelines and principles, preparing for the impending updates and their implications in the FX landscape.

As Dukes points out, “Essentially, it represents the best practices in the industry. It’s a comprehensive code of practice, encompassing a set of guiding principles.” In conjunction with the creation of the Code, the Global FX Committee (GFXC) was established, serving as a forum for collaboration and communication on FX matters. The GFXC plays a key role in promoting and maintaining the Code, while also adapting to market developments and trends.

Structure and its users

The Code, while not a regulation, represents a set of best practices divided into six key areas, further broken down into 55 principles. These principles are applied proportionally to each market participant’s level of engagement in the FX market, as highlighted by Dukes: “The important aspect is that they’re [the principles] applied proportionally.” This means that while banks might fully integrate all principles due to their extensive market involvement, smaller entities, such as corporate treasuries, will apply them to a degree that aligns with their scale of operations but still adhere to the fundamental standards. The six key areas of the Code include:

1. Ethics: Promoting fairness and integrity.
2. Governance: Ensuring clear responsibility and comprehensive oversight.
3. Execution: Exercising care in transactions for a fair and transparent market.
4. Information Sharing: Clear, accurate communications, and protection of confidential information.
5. Confirmation and Settlement: Robust control and compliance environment.
6. Risk Management and Compliance: Establishing efficient and transparent post-trade processes.

Each of these areas plays a crucial role in guiding market participants towards ethical, responsible, and transparent practices in the FX market.

Benefits for treasurers 

Adopting the Code has the potential to provide substantial benefits for treasurers and corporates, offering a proportional best practice framework that enhances risk management policies and procedures. This framework can aid corporate treasurers in establishing sound governance, ethical and professional behaviour, effective market interaction, and protecting confidential information. As Dukes highlights, “It helps maintain a good control environment to identify, manage and report on risks, whilst establishing the supporting infrastructure.” 

Further reflecting on the potential advantages for treasurers, Dukes suggests, ‘By embracing the principles of the FX Global Code, treasurers could significantly enhance their trading practices. It’s not just about adhering to ethical standards; it’s also about fostering fair and transparent interactions in the market. This commitment can lead to reduced conflicts of interest and improved market practices. Essentially, it empowers corporates to not only participate on an equal footing, focusing on quality pricing and execution, but also to hold their counterparts accountable, driving towards a more equitable and transparent FX market environment

Future developments and adoption challenges

The adoption and application of the Code among treasurers has varied, with a blend of formal adherence and practical usage. While the number of formal sign-ups remains low, many treasurers are actively leveraging the Code with a quest to enhance their market practices. However, as Dukes points out, the slower corporate uptake can be attributed to a range of factors including limited awareness, low management engagement, and the perception of its applicability. She notes, ‘The slow corporate take-up is likely to be a range or combination of things including lack of time, low management engagement, knowing where to start or even thinking it is not applicable.’ Furthermore, for many treasurers, FX is not a primary focus but a by-product of their core operations, often leading to other priorities overshadowing the Code’s adoption.

Despite these challenges, it is believed that treasurers who are well-versed in the Code could potentially gain a competitive edge, as the adherence to high standards of professional conduct might reduce disputes and facilitate access to competitive pricing, which in turn could strengthen the community’s voice in the FX market. Furthermore, as the Code does not impose additional legal or regulatory obligations and allows institutions to align their activities with its principles by signing the Statement of Commitment. 

To facilitate this, the GFXC has developed an online tool streamlining adherence, especially beneficial for entities with less complex FX activities. Additionally, the Code is undergoing a triennial review to address emerging market developments,. Dukes emphasises the critical role of treasurers in promoting the Code and suggests including its principles in processes like RFPs to encourage broader adoption. Importantly, she highlights, “The code takes proportionality into account, I think most corporations would be surprised to know that there might be no ongoing incremental work required over and above the governance and control reviews that they currently undertake in their day-to-day business.”

Benchmark of best practice

The FX Global Code of Conduct emerges as a benchmark of best practices in the FX market. Its flexible yet comprehensive framework allows a wide range of market participants to adopt and adapt the principles to their operations. As Dukes aptly summarises, “The FX code…should be on the top of everyone’s mind.” For corporates, it not only provides a structure for managing FX risks but also empowers them to contribute actively to the market’s fairness and integrity.