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MiFID II compliance leaving FX conduct code on sidelines

No one really talking about voluntary rules for foreign exchange

Willa Cohen Bruckner said few seem concerned about the FX code.

The FX Code of Conduct for money managers, brokers and other foreign-exchange market participants has taken a back seat — and possibly in some cases, no seat at all — to meeting MiFID II requirements, sources said.

"I have gotten no questions, no nothing" on the FX code, said Willa Cohen Bruckner, partner, financial services, Alston & Bird LLC, New York. "I don't hear people talking about the code. It could be how our clients are prioritizing this; it could be brokers not making a big deal out of this. ... A lot of people aren't even acting as if this is a concern."

The code was released by the Bank for International Settlements and 21 central banks on May 25.

Alex Dunegan, founder and CEO of money manager Lumint Currency Management, Boston, said the lack of industry awareness "rings true. … Some have never heard of (the code); some have but only indirectly. It's mostly because it's been all eyes on MiFID II; that's dominating all parts of the industry — sell side, buy side."

Added Ian Battye, chief investment officer, currency, at Russell Investments in Seattle: "We've asked our bank counterparties and peer asset managers" if they adhere to the code. "I think part of it is, do they know there's a code? I was generally struck by the lack of awareness" among the firm's FX counterparties, "how many people haven't even downloaded the principles and looked at them."

The code is a voluntary set of six principles of acceptable behavior for any firm, government or individual participating in the global FX market. Those principles, according to the code, require:

  • Ethical behavior, to avoid conflicts of interest;
  • A governance framework for market participants, including internal oversight and controls by signatories;
  • Fair and transparent execution of trades;
  • Guidelines for what data can be disclosed and what must be confidential, such as client information;
  • Risk management and compliance, with regular reporting and maintenance of robust compliance mechanisms; and
  • Efficient and transparent confirmation and settlement processes.

The complete code is available on the website of the Global Foreign Exchange Committee, an industry group representing central banks and FX market participants.

18-month window

The Bank for International Settlements and central banks provided a window of up to 18 months between signing the code and adhering to its principles. But given that adherence is voluntary, sources said requirements of the European Union's Markets in Financial Instruments Directive II, which went into effect Jan. 3, have taken attention away from the code.

"MiFID II is top-of-mind with clients," said Ms. Bruckner. "The FX code is being presented as giving comfort to counterparties." But, she added, "How much comfort are you getting" from a voluntary code? "To me, it doesn't have the force of a regulator. It would have to have something binding, some sort of enforcement."

The BIS and central banks "are trying to create a tone in the market" by asking for voluntary compliance. "I'm not sure that (a) signature makes that much of a difference. They think that if participants sign up, the more that do will be a sign that they're taking it seriously."

Russell's Mr. Battye, who wrote a blog post on Russell's website about the lack of FX code adherence, said ​ there could be different factors behind the seemingly nonchalant reaction. "One, it's not required," Mr. Battye said. "Look, there are a lot of regulatory changes going on. With requirements under MiFID II and other regulations, the code could drop down the list of priorities. Also, the code was only finalized in May 2017. It took years to build up, but it's still relatively new. It could also be an element of 'what's in it for me?' Giving teeth and transparency to the code is needed."

Russell has signed the code, Mr. Battye said.

An issue of time

FX trading venue operators, which also have been asked to sign the code, see the issue with some participants as being one of time. The workload to meet the code's requirements isn't as simple as checking a box, said Lisa Shemie, New York-based associate general counsel at Cboe FX, the foreign exchange trading venue formerly known as Hotspot FX.

"I think we've always seen, even up to the runup in May, that different entities would have different tasks to complete before signing the code," Ms. Shemie said. "Investment banks, even though they already have compliance in place, with all the different FX activity in different parts of the bank — the FX desk, asset management, M&A — it's a much bigger task for those banks to get the processes in place to comply. Just their FX desks, by their sheer size, processes and business practices, it's a much bigger task for them than it would be for a venue like Cboe FX."

Ms. Shemie said while investment banks and asset managers would "need to concern themselves with principal risk, its disclosure and transparency, Cboe FX, as a trading venue, doesn't have that. We have fewer things to check on than counterparties do."

Cboe FX also is a signatory to the code, Ms. Shemie said.

Mr. Dunegan at Lumint, which also has signed the code, agreed the work needed to comply will be problematic, particularly for money managers, but many think meeting MiFID II requirements will help with FX code adherence.

"The general view is that if they meet the MiFID II requirements, get the transparency and reporting requirements worked out, then that will align them with what the code is requiring," Mr. Dunegan said. The problem for managers, he added, is "setting up a process to review whether brokers have signed the code and to what extent they adhere to it. The buy side hasn't figured out how to determine that. The code will give the buy side a new look into how brokers trade. I think the buy side will need to digest that (FX trading) information that will be useful in choosing brokers for best execution. That will be new for a lot of the buy side."

Internal compliance is a legitimate issue for market participants, according to Darryl Hooker, head of FX for Europe, the Middle East and Asia and global head of spot and metals at NEX Markets, a New York-based electronic fixed-income and foreign exchange trading venue for institutional clients. NEX was represented on the market practitioners group that helped the BIS and central banks create the code.

"Rather than a lack of adherence, the issue at hand may be that market practitioners are behaving appropriately but as of yet have not completed their internal procedures to be able to sign off on the code," Mr. Hooker said in a statement. Members of the market practitioners group "cited the work their legal/compliance departments were doing in regard to MIFID II — being the priority to maintain their businesses — before being able to focus on the code. The various (central banks' foreign exchange committees) have provided members timelines for completion ... and have generally made this part of the criteria for future membership."

Both Lumint and Russell ask brokers if they adhere to the code but will not bar firms that don't.

"We're looking at the broker side as part of the best execution equation," said Lumint's Mr. Dunegan. "We ask if brokers adhere. But ultimately, we're for what the client wants ... ultimately it's their call."

Added Mr. Battye at Russell, "We are asking them the question. I'm reluctant to draw that line in the sand, but we want to know, if the counterparty hasn't signed, why they didn't."