A group of central bank representatives and private sector market participants known as the Foreign Exchange Working Group ("FXWG") released a new version of the "FX Global Code," a set of conduct standards and principles for foreign exchange ("forex") market participants. The FXWG was formulated in 2015 in order to "promote a robust, fair, liquid, open, and appropriately transparent market."
The new version of the FX Global Code expands the topics covered by Phase One of the Code (ethics, information sharing, certain aspects of trade execution, and trade confirmation and settlement) published on May 26, 2016 (see Cadwalader Clients & Friends Memorandum, June 1, 2016). The new version includes: aspects of execution on e-trading and platforms, prime brokerage, governance, and risk management and compliance. Other important topics covered in the new version of the FX Global Code include "pre-hedging" and last-look practices.
As a whole, the FX Global Code covers six broad areas:
- ethics;
- governance;
- execution;
- information sharing and confidentiality;
- risk management and compliance; and
- transaction confirmation and settlement.
Commentary / Steven Lofchie
The appropriate standards of conduct in the forex market have long been ambiguous, given (1) the absence (until Dodd-Frank) of much of a statutory/regulatory framework, (2) the fact that it is largely a principal market, (3) the limited involvement of lawyers and compliance personnel who might have served as "gatekeepers," and (4) limited trade reporting information that might have served as a check on misconduct. That period of ambiguity is ending. While the FX Global Code may not have the force of law, regulators and private litigants are likely to point to it as establishing the required standard of conduct.
Many of the principles established in the FX Global Code are basic; e.g., one should strive to do the right thing, firms should manage risk appropriately, and trade disputes should be promptly resolved. Other standards, particularly those related to executing and information walls, will need to be carefully considered as to how they are implemented. Firms should review (or establish) compliance procedures for their FX desks and should compare those procedures to those governing other similar but perhaps more regulated markets.
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