FX Regulatory changes in 2023

The Global Code of Conduct and the FX Markets

Episode 6

In our sixth and final episode of this limited podcast series we talk about the FX Global Code of Conduct and FX markets, and what changes we can expect in the future. We discuss why the FX industry needs a code of conduct, and how regulators think about spot FX that falls outside the regulatory perimeter.

Host: Mike Cahill, Head of Video & Podcast Content Production for Sales Enablement, LSEG
Guest: Chris Leonard Appleton, Head of FX Risk & Regulation, LSEG

Listen to the Podcast

  • Mike: And we're heading into the sixth and final episode for now of our special limited podcast series on FX rules changes in 2023. Our goal here is to talk about the global Code of conduct and the FX markets and what changes we can expect in the future. I'm Mike Cahill, head a video and podcast content for sales enablement at the London Stock Exchange Group.

    Mike: And I'm joined by Chris Leonard Appleton, head of FX risk and regulation at LSG. 

    Mike: Why has there been so much focus on conduct in the markets over the last few years? 

    Chris: Well, I think to answer that question, we need to go back in time, to be honest. So if we go back to November 2014, we had some of the largest fines imposed by the FCA on five of the banks in the UK and there's - actually later was six.

    Chris: I mean the fines exceeded ¬£1,000,000,000 and the cause of that was really from manipulation of the London FX 4pm Fix, which was obviously a pretty egregious thing. You know, penalties were later levied by the CFTC and the Swiss authorities. Then if you rewound pretty much precisely one year forward, a couple of banks were fined by the

    Chris: New York Department of Financial Services around their last practices went to July 2016.

    Chris: Another UK bank was challenged by the US Department of Justice for front running client orders in FX. And then in November 2016, two Australian banks were fined for attempting to rig the benchmark for the Malaysian ringgit. So it's safe to say there was a two year period in which conduct in the markets was found to be severely lacking. And yeah, there were a lot of pauses around that, which the FCA later sort of opined on, sort of poor financial incentive schemes, poor compliance, risk controls, all this sort of stuff. And I might add, yet the cultural practices weren't just confined to FX or the poor cultural practices. Several years prior to that, there'd been the LIBOR scandal and then there've been a number of scandals around interest rate swap mis-selling as well.

    Chris: But I think it's safe to say it was a particularly dark period for the markets in general and it was clear that something really had to be done about it. 

    Mike: So in response to all of that, Chris, what concrete action have regulators and the industry taken? 

    Chris: I think there were a few. So to begin with, the Bank of England and the FCA launched the Fair Enough, Fair and Effective Markets Review in the UK.

    Chris: And yet, given the importance of the UK markets, particularly at the time, a lot of other regulators sort of followed that with close interest, that really looked at what was going on in the markets across the financial services industry. Off the back of that in FX, we then got the the FX global Code of Conduct and we also had the establishment of the GFXC in 2017, which is now the organization that maintains that code.

    Chris: So the code is really a set of standards that have been agreed between all of the major central banks, all of the main sort of regulators and obviously a set of market practitioners who fit in, including what was Thomson Reuters and Refinitiv at the time. Obviously now LSEG and you know, it covers a lot of the usual stuff.

    Chris: So ethics, governance, execution, the use of confidential information and so forth. So generally speaking, it's there is a voluntary code to have a difference is very much a key focus for the industry at the moment on that. 

    Mike: So why does FX need a code of conduct? Shouldn't this be covered by normal regulation? 

    Chris: That's a really good question. To answer that you need to look at spot FX, which with only a couple of exceptions, is generally outside of the regulatory perimeter.

    Chris: So it's an unregulated product or instrument. So that means that the usual conduct rules that MiFID or the Financial Services Act don't apply to spot FX. And that's actually why the code of conduct was required. It's also why it's voluntary, and that's now causing a lot of, you know, I would say, issues, but it's coming into focus because you can't really make something mandatory without either getting people to agree it via a contract or bringing it into the legislative and regulatory perimeter.

    Chris: So of course, now there's a huge amount of focus on how you ensure adherence to the code, and a lot of that really has to come down to peer pressure. Although I might add here, the regulators, like the FCA, are using some of the statutory tools that they have available, like the senior managers regime, sort of as a carrot shaped stick, if I can put it that way, to try and ensureadherence moving forward.

    Mike: So do you think this is all resolved now? Chris? I mean, have the regulators closed this chapter or are they still scrutinizing this part of the market? 

    Chris: I think it's safe to say the regulators will not stop scrutinizing this, and nor should they, frankly. And I don't think the industry should ever become complacent about it. Yeah, there's been a lot of developments since really those days.

    Chris: Most recently, we had an update to the code that was the end of 2021. Most of those changes really revolved around things like disclosures of order rejects and how banks will reject orders and why use of tagging, use of conflicts of interest and codes around that use of confidential information. So there's still a lot of updates that are occurring to the code and away from the code.

    Chris: There's still a lot of activity from the authorities as well. So most notably, ESMA put out a call for evidence last year on pre hedging. So primarily looking at potentially abusive activity involving pre-hedging during the last window that could potentially start to look rather uncomfortably like front running, frankly. So yeah, I think there's still a lot of scrutiny.

    Chris: But in terms of whether all of this has worked, I think there wasn't that much empirical evidence, frankly, as to whether contact has improved. But I think what we have seen is a reduction in fines levied together with an increasing assertiveness from a number of the banks that will only deal with signatories to the code. So I think those two things on their own are very positive evidence of improvements being made.

    Mike: So, Chris, as a final question for this episode, what sort of role has LSEG played in all this? 

    Chris: Well, I mean, we take contact very seriously and we were one of the leading players, as I said, in helping to draft the code back at its inception. We did that via our membership of a lot of the main local FX committees.

    Chris: And of course we were a member of the GFC as well. So as a as a venues operator, we're absolutely committed to ensuring a high level of fairness and integrity in all the markets we operate, but continue being an active participant in the conversations with the GFXC in the years to come. And crucially we re-attested to the code and on the 5th of October last year.

    Chris: Some good news on that front. 

    Mike: All right, very good, Chris, Thanks once again to Chris Leonard Appleton, head of FX risk and regulation of the London Stock Exchange Group. This wraps up our series of six special podcast on regulatory changes in 2023. I'm Mike Cahill, and thank you all for listening.

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