United States: Foreign Exchange Prime Brokerage And The FX Global Code

Last Updated: June 13 2017
Article by Curtis A. Doty

Foreign exchange prime brokerage is a credit intermediation service whereby, in its simplest form, a prime broker enables its clients to seek liquidity in foreign exchange ("FX") transactions from any one of a number of executing dealers with whom the prime broker has "give-up" relationships, such that once the client and executing dealer have committed to a transaction's terms and the trade is given up to and accepted by the prime broker, corresponding offsetting transactions result between the prime broker and its client, on the one hand, and the prime broker and executing dealer, on the other, with the executing dealer consequently bearing no credit risk exposure to the prime broker's client. Because of the tandem roles of the prime broker and executing dealer in the execution and give-up process, prime brokerage does not fit precisely into many of the new regulatory paradigms affecting the execution of derivatives transactions, and the prime brokerage market has had to develop special procedures to facilitate compliance.1

The latest market reform measure (albeit a voluntary one rather than a regulatory mandate) to impinge on FX prime brokerage is the FX Global Code (Code),2 a set of "principles of good practice" produced through a collaborative effort between central banks and private market participants and released on May 25, 2017, by the Global Foreign Exchange Committee (GFXC), a newly formed global association of central bank-sponsored FX committees that will maintain and update the Code.3 This Legal Update highlights several principles of the Code that expressly address FX prime brokerage.

The FX Global Code

The aim of the Code is to promote the integrity and effective functioning of the wholesale FX market. The Code is intended to apply to "Market Participants,"4 a term defined to encompass most categories of participants that are active in the wholesale FX market as a regular part of their businesses, and generally expected to include financial institutions, asset managers, sovereign wealth funds, hedge funds, pension funds, insurance companies, corporate treasury departments, non-bank liquidity providers, execution facilities, brokers, aggregators, e-trading platforms and, except where it would inhibit discharge of their legal duties or policy mandates, central banks and supranational organizations.

Among the measures to encourage voluntary commitments by Market Participants to conduct their FX activities consistently with the Code's principles, a working group of central bank officials has announced that their central banks intend to adhere, and will expect their regular FX trading counterparties to adhere, to the Code's principles except where this would inhibit the discharge of the central banks' legal duties and policy functions.5 In addition, an annex to the Code sets forth a Statement of Commitment, which Market Participants may choose to adopt and furnish, either publicly or individually to other Market Participants, to signal their commitment to following good practice. The Statement of Commitment includes an affirmation that the institution has taken "appropriate steps, based on the size and complexity of its Activities, and the nature of its engagement in the FX Market, to align its Activities with the principles of the Code." Based on participant feedback, the GFXC anticipates that most Market Participants will need approximately 6 to 12 months to implement appropriate steps to support their adoption of the Statement of Commitment.

The Code states that it does not impose legal or regulatory obligations, modify applicable law, bind any regulator or provide a legal defense to a violation of applicable law.6

Principles of the FX Global Code That Expressly Address FX Prime Brokerage

As defined in the Code, a "Prime Broker" is:

An entity that provides credit intermediation to one or more parties to a trade based on pre-agreed terms and conditions governing the provision of such credit. The Prime Broker can also offer subsidiary or allied offerings, including operational and technology services.

A "Prime Brokerage Participant" is:

A Market Participant that is either (i) a Prime Broker, (ii) a Client using the services of a Prime Broker, or (iii) a Market Participant acting as an executing dealer (price maker) or execution intermediary (such as an Agent or platform) between the Prime Brokerage Client and the Prime Broker.

Principle 41 of the Code is devoted to fostering real-time monitoring by all Prime Brokerage Participants of trading and credit permissions for prime brokered trades.

Principle 41 states:

Prime Brokerage Participants should strive to monitor and control trading permissions and credit provision in Real Time7 at all stages of transactions in a manner consistent with the profile of their activity in the market to reduce risk to all parties.

The Code articulates the contribution expected from each category of Prime Brokerage Participant with regard to this principle:

  • Prime Brokerage Clients should strive for Real-Time monitoring of their available lines and permitted transaction types and tenors so that only trades within permitted parameters are executed.
  • Executing dealers should strive for Real-Time monitoring of designation limits to validate trade requests prior to execution.
  • Prime Brokers should (i) have systems reasonably designed to monitor trading activity and applicable limits upon receiving give-up trades, (ii) be in a position to accept trades in accordance with terms and conditions within Prime Brokerage agreements and designation notices and (iii) have policies and procedures reasonably designed to address limit breach exceptions, limit changes, amendments and novations.

Several other Code principles, while not limited to prime brokerage, expressly discuss how they apply in that context.

Principle 26 (risk management framework): Market Participants' risk management and compliance frameworks should take prime brokerage activity into account. Prime Brokers are "encouraged to engage in ongoing dialogue with those for whom they are providing credit intermediation ... to underscore expectations regarding appropriate behaviour in the market."

Principle 15 (resolution of trade discrepancies): Where their identities are known to each other, the Code allocates responsibility to prime brokerage Clients and executing dealers for resolving trade discrepancies to achieve timely amendments and matching of trade terms through the Prime Broker. When anonymous market access is provided, the access provider should assist in the resolution of trade discrepancies.

Principle 19 (identify and appropriately limit access to confidential information): Prime Brokers should have an appropriate level of separation between their prime brokerage business and their other sales and trading business, including appropriate information barriers, and should be transparent as to the standards they require and adopt.

Because the Code sweeps broadly into nearly all aspects of a Market Participant's involvement in the wholesale FX markets—viz., in the areas of ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement—even Code Principles that do not specifically target prime brokerage could have an impact on prime brokerage operations, and prime brokerage participants will want to assess the effects of the Code in its entirety. Topics of potential interest not dealt with in this Legal Update include, among others, markups, order handling, clear communication of the capacity in which a participant is acting, treatment of confidential information, pre-hedging, and "last look," a topic on which the GFXC is currently seeking feedback.8

Footnotes

1 See, for example, the ISDA Derivatives/FX PB Business Conduct Allocation Protocol (May 6, 2013), available at http://www2.isda.org/functional-areas/protocol-management/protocol/13.
2 FX Global Code, available at http://www.globalfxc.org/fx_global_code.htm.
3 Further information about the FX Global Code and the GFXC is available on the GFXC website: www.globalfxc.org.
4 A "Market Participant" is a person or organization (regardless of legal form) that: (i) is active in FX Markets as a regular part of its business and is engaged in the activity of the purchase or sale of one currency against another, or in transactions designed to result in gains or losses based upon the change in one or more FX rates, such as derivatives, whether deliverable or non-deliverable, either directly or indirectly through other market participants; or (ii) operates a facility, system, platform, or organization through which participants have the ability to execute the type of transactions described in (i); or (iii) provides FX benchmark execution services; and (iv) is not considered a retail market participant in the relevant jurisdiction(s). Where consistent with context, the term includes personnel who conduct the foregoing on behalf of a Market Participant. FX Global Code at 3.
5 Foreign Exchange Working Group, Report on Adherence to the FX Global Code (May 2017) at 4, available at http://www.bis.org/mktc/fxwg/adherence_report.pdf.
6 This statement is, of course, not dispositive of the legal effects of the Code, or of a Market Participant's adoption of the Statement of Commitment, in any jurisdiction. Market Participants will no doubt wish to evaluate independently to what extent, if any, the Code, and the adoption or not of the Statement of Commitment, could affect the legal, business, reputational and other risks inherent in their FX market activities.
7 The Code defines "Real Time" to mean "[n]ear, or close to, the actual time during which a process or event occurs." Global FX Code at 71.
8 See GFXC Request for Feedback on Last Look practices in the Foreign Exchange Market (May 25, 2017), available at http://www.globalfxc.org/docs/consultation_process.pdf.

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2017. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions