Debelle makes the case for FX Global Code

  • By Elizabeth Fry

The FX Global Code is potentially transformative because it captures all sections of the marketplace: buyers, sellers, investors and platforms.

And while there is no legal or regulatory duty for market participants to adopt the code, Guy Debelle (pictured), Deputy Governor of Australia’s central bank is counting on peer pressure to shore up support for a Code that seeks to clean up the world’s biggest market.

Debelle, who also heads up the Bank of International Settlements FX working group, stressed that the code is principles-based rather than rules-based because “rules are easier to arbitrage".

The Code is not regulation he said in a speech at a Thomson Reuters event on Thursday night. Nor was it designed to replace local laws. Rather, it seeks to permanently change the way currency dealers, traders, investors and salesmen act and communicate through the ‘"democratisation of responsibility".

Alongside drafting the Code, the central bank official devoted considerable time and effort to thinking about how to get market participants on board.

“Clearly, that has been an issue with the various existing codes that have been in place in a number of markets over many years. It is evident that they were ignored on occasion, wilfully or otherwise,” he added.

Market misconduct

FX scandals have led to mass fines across investment banks, with UBS, JP Morgan, Citi and Barclays paying a combined US$10 billion to settle allegations of rigging foreign exchange markets.

Just last month, France’s BNP Paribas was fined US350 million for years of “nearly unfettered misconduct” in currencies. Key to the Code’s success will be the market itself, Debelle told his audience. 

“The adherence to a voluntary code will only come about if firms judge it to be in their interest and take the practical steps to ensure the Code is embedded in their practices."

But in his view, the market has already evolved to a point where a lot of the practices have already improved and a lot of the difficult conversations have already been had. 

Plus Debelle sees the Code as improving the FX market function.

“Often you hear people saying regulations make the market worse so I can make a pretty strong case that it (the Code) is beneficial,” he said.

“In the past I don't think there was a consensus about what constituted good practice. And now what we are trying to provide is a basis for that consensus. Now, as a market participant, I have more chance to call out behaviour which I don't think is consistent with best practice and because there is some commonality of understanding as to what does constitute good practice, it allows me to ask questions if something doesn't look right.

“Going forward, if I saw something that doesn't look right I can opt to take my business elsewhere. This is actually a credible threat because wherever else I take my business, I can have confidence they will treat me fairly in a way that may not have been true in the past," he continued.

Commercially damaging

Debelle expressed confidence that he has “pretty good coverage at the core of the market".

Asked whether adopting the Code could be seen as commercially damaging to banks, he simply questioned the commercial sense of a bank being fined for bad behaviour.

In due course, Debelle added, adherence to the Code will likely become a requirement of Foreign Exchange Committee membership. Further, the BIS central banks have also indicated they themselves, as well as their counterparties, will follow the Code.

From where he sits, banks should take between six to 12 months to get their systems in line for full compliance, although the amount of effort required will in part depend on the nature and extent of engagement with the FX market. 

The Code will be owned and updated by the Global Foreign Exchange Committee, which will regularly check for updates or additions. 

“As the first example of this, given the diversity of views on the use of ‘last look’, the GFXC is is currently requesting feedback on trading in the last look window.”

This gives the banks the scope to withdraw prices at nano-seconds notice. Barclays was fined $150 million in 2015 for misuse of that facility.