New code of conduct for the forex market

The foreign exchange (forex) market ranks among the largest and most liquid markets worldwide, and activities there have hitherto been largely been coloured by regional trading customs (market practices). In an effort to bring these practices into greater alignment worldwide and safeguard the integrity and effective functioning of the forex market, in May 2015 the Bank for International Settlements (BIS) initiated work on the Foreign Exchange Global Code of Conduct. The BIS entrusted the task of drawing up the Global Code to the Foreign Exchange Working Group, a body composed of senior officials responsible for market operations at 16 central banks from the 15 largest currency areas, including experts from the Eurosystem.  

Worldwide expertise

Published on 25 May 2017, this Global Code is the first set of guidelines that will apply in multiple jurisdictions around the globe and which was developed by a partnership between central banks and private sector market participants from all the major currency areas. It pools expertise from the public sector, which was represented by central banks and monetary authorities, and from the private sector, thanks to the input from commercial banks, trading platform providers and industrial enterprises. Interaction between the two sides was intense, judging by how the Global Code has evolved since the first part was completed and published in May 2016. In the intervening period, market participants have been sent regular updates for review and feedback. "By drawing up this Global Code, central banks around the world together with the market participants have taken on board the lessons from the financial crisis. The Bundesbank sees these guidelines as a crucial contribution to safeguarding sound business practices in what is a core segment of financial markets," said Bundesbank Executive Board member Joachim Wuermeling upon the Global Code's publication.

Code made up of 55 principles

In detail, the Global Code is made up a series of principles which are intended to promote a robust, fair, liquid, open, and appropriately transparent forex market worldwide. It defines 55 principles covering the areas of ethics, governance, execution, information sharing, risk management and compliance, and confirmation and settlement processes with a view to establishing appropriate and comparable standards of behaviour around the world. Furthermore, the Global Code offers practical examples of high standards of behaviour which market participants should strive to emulate in certain situations. It includes proposals on the determination of prices and provides illustrative examples of both acceptable and unacceptable practices (see the example in the box below). The Global Code does not, however, take the place of banking regulation, nor does it impose any legal obligations on market participants. The Bundesbank gears its trading operations towards the requirements formulated in the Code and expects its counterparties to do likewise, after a suitable implementation period.

Evolving over time

The Global Code may have been published, but it is still a work in progress. There are plans to update and revise the document at regular intervals so as to keep pace with market and sectoral developments and remain a relevant source of guidance and best practices. Responsibility for updating and refining the Global Code lies with the Global Foreign Exchange Committee (GFXC). This body also comprises the European System of Central Banks, which will contribute to continually improving this set of guidelines for international forex trading operations.

One example from the Global Code:
How banks determine mark-ups fairly

Clients transacting a forex order with a bank pay that bank a mark-up on the forex rate, the amount of which is determined by multiple factors. These include client credit quality, services rendered to the client, and factors related to the nature of the specific transaction and those associated with the broader client relationship. The mark-up applied to client transactions by market participants should generally be fair and reasonable.

A stylised example listed in Annex 1 of the Global Code shows how a bank applies different mark-ups for different clients of a similar size and credit quality. These are due to differences in the broader client relationship - thus, the volumes of the respective transactions between the client and the bank differ substantially. The Global Code recommends that this practice by the bank should be permitted in principle but states that applying a higher mark-up would not be fair and reasonable in a situation where clients are treated differently owing to a lack of expertise.