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Global FX Code: Growing Expectations

ESMA’s review of the Market Abuse Regulation places reliance and expectations on the Global FX Code. Particularly in relation to whether, or when, to regulate spot FX. Both ESMA and the FCA want to see the impact of the Code on the markets for which they have regulatory responsibility.

What is the Global FX Code?

The Global FX Code is a set of principles for the FX market. A group of central banks with input from sell side and buy side developed the code.

The Code itself include examples designed to show where to draw the line on greyer areas.

Current state of the code and future play

Regulators around the world recognise the Code. In the UK there is no regulatory obligation imposed that requires you to commit to, nor adhere to the Code.

The FCA is recognising the code until 2022. It will take a view then whether it is changing behaviour and getting sufficient commitment from those facing or the markets.

FCA already has some ability to enforce the Code

The Code is not a regulation or a rule requirement. The FCA says that the Code evidences reasonable individual behaviour.

As a regulated firm, the FCA expects you to establish systems and controls that ensure proper standards of market conduct. They will use the Code to inform decisions around whether that behaviour is or not ok as it relates to the markets in which you are in or face.

If you are an individual who is in scope of the FCA’s Conduct Rules then you are required to meet proper standards of market conduct. FCA will decide whether you have met those proper standards by reference to the Code.

Should you commit to the Code?

The regulatory position is such that not having committed to the Code is building to become an awkward future conversation.

As more firms commit to the Code the general expectation amongst counterparties could extend to expecting the company’s they work with to follow the Code. There is also the future risk that the Code becomes de facto market practice and counterparties have a legal right to expect firms working in FX markets to adhere to the Code.

The FCA stance on how it will judge personal behaviour in future makes committing to the Code more of an imperative. It brings a risk of employees, or the FCA, making a future accusation about a company’s policies and procedures not following market practice.

Implementing the Code

If your firm has implemented MiFID2 and you have written policies and procedures, then you will find implementation straightforward. It should take you 4-6 months.

Key to implementation is to have the internal discussions about what your firm’s own stance is on elements of the code. A good example of this is execution risk where this conversation starts well at firm-specific workshops the outputs from which translate into internally agreed approaches and then aligned with policies and procedures.

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