Why comply with the voluntary code and why ask others to adhere to it? The code reflects a heartfelt effort on the part of the Foreign Exchange Working Group, the Market Participant Group and others to improve the functioning of the FX market and the behavior of its participants. Not all of the principles apply equally to each participant, and some may not agree with a particular principle for a number of reasons. Yet, the principles reflect a consensus; anyone operating directly or indirectly in the market should take the code seriously from a compliance standpoint. For example, a plan fiduciary might wish to review the code and compare the principles with how the fiduciary in fact conducts FX activity. One can imagine a plan committee asking its investment managers to explain how the code affects their portfolio and how the manager is working to comply with it. This analysis could be taken a step further, with the plan committee asking not only whether the investment manager itself complies, but also whether the counterparties the investment manager selects are aware of, and comply with, the code. Will investment committees insist that investment managers only trade with counterparties that adhere to the code?
Investment managers that are fiduciaries to plans might want to embrace the code and advertise that fact to their plan clients. If there is skepticism of FX as a transparent market, an investment manager could seek to allay these concerns by explaining the code to its plan clients and how the code aims to make the operation of the market less opaque. As a diligence matter, plan clients are likely to look favorably upon those investment managers who demonstrate an awareness of best practice developments and a willingness to raise this awareness with the plans. Adherence to the code may ultimately create a competitive advantage.
The code is in its early days. There is much enthusiasm about it and it may be revised every few years as the code becomes more and more mainstream and practices evolve. Although it is not a law, the code reflects a spirit and desire to make FX more trustworthy and honest. Its development has forced discussion and debate over how the market should operate and how participants should behave. For those plans that trade in FX at all, even just to hedge, the code sets forth good practice principles that apply to them, their service providers and their counterparties. The code can serve as both a discussion item and as a way to guard against abusive practices. Though FX does not take as primary a role as equities in plan operation and management, it is an indispensable market that is striving hard to be a better version of itself.
George Michael Gerstein is counsel at Stradley Ronon Stevens & Young LLP in Washington. He has previously worked as an attorney supporting the foreign exchange unit at State Street Global Markets. This article represents the views of the authors. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.