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The Focus has Returned to Ethical Codes in Financial Markets

For years, since the first version published in 1975 and until the retirement of the last version in May 2017, the �°������ϲʹ��� Model Code has existed as the standard benchmark for financial markets globally, being recognised by industry practitioners and central bankers for the assistance it has provided to market professionals.

However, other than for local and international members of the �°������ϲʹ��� (�°������ϲʹ��� FMA), ethical conduct and the importance of the Model Code have not always had the focus required. The net result of the previous lack of focus on education and conduct issues has been a series of fines and investigations into the behaviour of individual market participants and their supervisory environment.

These investigations have unearthed individual behaviours that are unacceptable and have presented challenges to the industry. Therefore, the focus has naturally returned to ethical codes. Note that these behaviours and fines are not unique to FX, as similar behaviours have been brought to light in investigations for benchmarks in interest rate and commodity markets, and other forms of practice are also coming under review. The total cost of this is not just the sum of the global fines, but also to the industry more broadly. Additional resources have been costly, as has been the sharply reduced activity in the market.

It is clear that wholesale financial markets need to reverse this behaviour by finding industry wide solutions. Large amounts of money have been thrown at solving the problem within individual banks, but results have been challenging. Few, if any, institutions are willing to take the lead by declaring themselves to have the answers. The paralysis is made worse by most institutions wanting to wait for the result of the various consultations and investigations, many of which have not defined their dates of closure. Importantly, the key National Competent Authorities in Europe (such as the Bank of England/FCA/PRA in the UK and FINMA in Switzerland) have made it clear that they were expecting the industry to propose its own solution, and to be prepared to demonstrate the profound changes to management and staff culture within each institution.

The answer has been found in the creation of the FX Global Code, led by the Global Foreign Exchange Committee, as a credible set of good market practices (including ethical conduct) that can be applied across the FX industry and to which the industry is willing to adhere, as it promotes fairness and appropriate transparency to the FX market.

In addition, the FX Global Code intends to promote a robust, liquid and open market in which a diverse set of Market Participants (entities and individuals), supported by resilient infrastructure, are able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behaviour.

The FX Global Code is voluntary, and it is important to note that the regulators are NOT seeking to impose codes of conduct, as they fully admit that the expertise resident in the market should best determine how it functions. It is also important that the market comprises buyers and sellers of all shapes and sizes, none of whom want to have inappropriate regulation imposed upon them, and all of whom want a fair and effective solution.

So what choices are available, and which is the best choice? Codes fall into three basic categories: individual company codes, regional or sector codes, and global codes.

Individual Company Codes

Individual company codes have a number of characteristics that make them attractive. They can be written in house (often by outside counsellors or hired specialist advisors) and can be tailored to match the look and feel of other policies that apply to the same institution. They can be adapted to fit the specific needs of the institution and can be written to suit a particular risk culture: a highly stringent code may be more desirable in certain circumstances than a more liberal code, depending on the parameters required. Often, they apply to the jurisdictions in which the institution operates, and do not need to be applicable elsewhere. If desired, they can be incorporated into a training programme to help embed the behavioural aspects of the code and run in parallel with other in-house training requirements.

However, they can be very expensive to produce, often to a confidence level that is difficult to ascertain. They are usually written with the specific bias of the institution in mind, and by one person or a small group with regard for protecting the institution. This commercial bias may be regarded with suspicion by clients. They are not usually in line with the global requirements of the industry, are maintained too infrequently (or at great expense) and can be confusing to clients who must match off their dealing needs against a large number of individual codes.

Regional or Sector Codes

Regional codes or other codes written by a specific sector of the industry, can sometimes produce a better result than Individual Company Codes. They often address specific issues, such as value dates for trades or with an emphasis on a certain type of trading (say, non-deliverable forwards), and may contain information specific to their authors. They are written by representatives of that region or by a specific sector (say, the large sell-side banks) and require a high degree of consensus to be effective. This can make their timeliness less impressive, as the time lag between updates can be long, and with onerous processes to produce updates. Their applicability is to the sector or region, with potentially limiting attributes for the broader, global markets. There is also the risk of creating a fractured market, or an uneven playing field, as regional codes exhibit a bias that may favour one region or sector over another.

An example can be found in the United Kingdom Money Markets Code which contains guidance and related principles that can be applicable by Market Participants in other jurisdictions around the world.

Global Codes

The FX Global Code has a global reach, as well as the Global Precious Metals Code, both being released in May 2017. They are written by groups of professionals and market practitioners for the use of market practitioners, providing an important overview on practical matters as well as giving recommendations on ethical and moral issues.

As expected, since their launch, several members of �°������ϲʹ��� FMA have embedded the good market practices advocated by these Codes in their daily procedures, as they are internationally recognised as the standard guidance for Market Participants from all sectors of their respective industries.

These Codes have a general nature, being less descriptive that the old Model Code. With the objective of supplementing local laws, rules and regulations, the FX Global Code and the Global Precious Metals Code do not impose legal or regulatory obligations to Market Participants and it is not a substitute for local or international regulations.

The intention is that these Codes are updated regularly, so that they remain relevant to their respective markets and users. For example, there are several working groups discussing challenges and evolutions in the FX industry with their feedback being extremely relevant for the planned reviews of FX Global Code.

Importantly, there is no reason that the FX Global Code, for instance, can’t run in parallel with an individual company code. Indeed, there is a good reason for doing so as individual codes are tailored to meet specific requirements, whilst the FX Global Code can give credence and credibility with all clients and meet global needs. Many institutions apply both types of code, and if there is a dispute, the stricter guidance applies (or allows for a change in the individual code).

The FX Global Code has several significant attributes to bring to the wholesale financial markets. Its adoption can significantly assist the industry by bringing a well-functioning self-regulated FX market back to the fore, and in serving the broader economy. The FX Global Code can help ensure a globally level playing field for regulation and can be adopted by all institutions across all jurisdictions. It can be easily embedded, and it brings the positive culture change to the industry that regulators and governments were demanding.

Why is education important on the adherence to Codes?

With education, training and examinations, practitioners develop their own internal “moral compass” and no longer require tight, costly surveillance as staff demonstrate their ability to conduct their business appropriately. Experienced staff teach the less experienced how to behave ethically, and protect the interests of clients, shareholders, their employer and the general public.

Therefore, �°������ϲʹ��� FMA has developed the ELAC portal for e-learning, attestation and certification on industry codes. This tool allows staff from all Market Participants to access continuous training on questions and “real life” scenarios on the respective code, allowing testing on its definitions and practical application.

�°������ϲʹ��� FMA has also developed two examinations on the FX Global Code, an online, taken anywhere version and a test centre version. These exams are available to allow for suitable testing of the knowledge of this Code by individual market participants who require this guidance.

Both ELAC and the exams are highly attractive for management to demonstrate its commitment to installing the best practices within their institutions, and for senior management and board directors to satisfy themselves of the culture change taking place inside their company.