Differences in scale and technological prowess among players mean the wholesale foreign exchange market may never be a truly level playing field, but the Global FX Code of Conduct aims to make it better.

The code, which came into effect in May 2017, was developed by the Bank for International Settlements, representing central banks in 16 jurisdictions along with market participants from around the world. It provides clear guidelines for management of foreign exchange (FX) practices, including how to identify and escalate breaches.

At the CFA Australia Investment Conference 2017, held in Melbourne last month, a panel of experts evaluated the guidelines, which are intended to augment, rather than replace local regulation.

Square Peg Capital head of distribution Leila Lee, who facilitated the panel, noted that the code is designed around six principles: ethics; governance; execution; information sharing; risk management and compliance; and confirmation and settlement process.

National Australia Bank head FX trading, corporate and institutional banking, Mark Lawler, said he was hopeful the code would lead to less complacency and better processes around information sharing.

Weed out complacency

“I think one of the primary reasons the FX industry got into the place that it did was because of complacency,” Lawler said. “We had an explosion of information – FX volumes in 1998 I think were $2 trillion a day on average, and in 2010 I think we were at $3.5 trillion. That leads you to trade on and talk on various communication lines, and I think management was caught out.”

He said the code provides a clear and concise way to address complacency by outlining how investment organisations can better approach their responsibilities to train and supervise staff.

“No longer can you just be content with compliance, m­­­­easurement and assurance around the corner…They sit right next to you, and if you’re a supervisor, you’ve got an absolute responsibility to ensure that you will call that behaviour out,” Lawler said.

Participants in FX markets are applying innovations such as algorithmic trading, machine learning and artificial intelligence. IFM Investors investment director Richard Kerr questioned what that means.

“Obviously, the currency market is incredibly large and incredibly fertile for technology, and technology users and creators can proliferate tools and algos [algorithms] and lots of stuff…but to whose benefit?” Kerr pondered.

He was optimistic, however, that the Global FX Code would help educate all market participants about how currency trading works and how the FX function fits within the broader investment team.

“Currency is one of those asset classes − if you want to call it an asset class – that tends to be under-resourced, and there is a question of ‘does it live in the investment team, does it live in the ops world?’” he said.

The new tech challenge

It is important for the future of the investment profession that those in a fiduciary role make sure they understand the proliferation of new technology, Kerr said.

“You don’t want to rely on regulators to step in and say this needs a cultural uplift…You don’t want regulators to sanitise the market [and] we don’t want people who run money for the investor to become complacent.”

QIC senior portfolio manager Stuart Simmons said it was important that the measures organisations take match the spirit of the code, which is designed to rebuild trust in the FX industry.

“In terms of the problems the code is trying to address − lack of trust, lack of transparency, and a lack of accountability − the FX industry will never be a level playing field,” Simmons said. “There are lots of technological and informational advantages that come with scale. But at least the code represents rules for players to abide by.”

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.