In May, the Bank for International Settlements (BIS) published the FX global code of conduct – consisting of 55 principles covering ethics, governance, execution, information sharing, risk & compliance, and confirmation & settlement – for global FX markets. The aim of the voluntary global code is to raise standards and promote fairness and efficiency in foreign exchange markets. Its principles could have an impact on how banks interact with corporate treasury departments. In a webinar earlier this year, Neill Penney of Thomson Reuters discussed how the code will change the global FX landscape and touched on what corporates using FX markets could expect to see from their banking partners. In particular, there are several behavioural changes that corporates might see from their banks:
1. Principal or agent?
There is a distinction between a banking partner that acts as the 'principal' provider of FX services and a banks that acts as an agent – although banks can sometimes fulfil both roles. While the 'principal provider' will give a fixed price for a particular transaction, an agent is expected to obtain the best pricing in the best market/venue, usually providing an audit trail of several pricing options. Both have a duty to act in the client's best interests and have a 'duty of care' to the client. The FX global code will mean there is a clearer distinction between these two modes of providing FX pricing to corporate customers.
2. Handling of orders
The FX code makes several recommendations for conduct in handling of FX orders including: appropriate sharing of information; confidentiality; appropriate segregation of information between sales desk and trading desk; pre-hedging is OK but must be done in client's best interests; and no market manipulation to trigger the order.
3. Mark-up/cost transparency
While banks aren't expected to provide a breakdown of costs on a trade-by-trade basis, the code means that corporates can now expect to have a conversation with their banks about the general composition of the mark-up, particularly the components of the mark-up that relate specifically to them, such as credit risk.
4. Last look transparency
Last look – the practice of allowing liquidity providers to have a final look at an order placed by a trader, i.e., an opportunity to reject or accept the trade – is an accepted part of the FX industry but the FX global code aims to ensure there is reasonable transparency around the practice and that it is fair.
For those interested, here is the FX global code of conduct in full.
And to hear the Thomson Reuters webinar, in association with Treasury Today, in full, register here.
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