June 19, 2017
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Central Banks Launch New FX Code, Aim at Universal Adoption

By Patrick Graham

LONDON  - Regulators and leading financial firms launched a new code of conduct for global currency trading on Thursday, including measures aimed at forcing its universal adoption by the world's major financial institutions.

Industry players said the code was its last chance to head off full formal regulation of the $5 trillion a day market after a scandal over market manipulation and misuse of client information that saw seven major banks fined around $10 billion at the end of a huge global inquiry in 2015.

Most of the document was published a year ago and the final version's main additions include measures that ask banks and a new generation of electronic traders to provide more details on the algorithms they use and their trading processes.

It also addresses and launches a formal consultation over the controversial "last look" practice that allows banks and other liquidity providers an extra chance to reject trades after receiving requests to execute.

The 75-page document lays out 55 high-level principles - rather than hard rules - for how participants in the world's biggest financial market should conduct business.

While it remains nominally voluntary, Thursday's package of documents also outlined a framework that some of the officials working on the project said should mean all major market players will commit to conforming to the new code.

All of the major central banks involved said they would commit to sticking to the code's guidelines and would demand it of their counterparties in the $5 trillion a day market which is the world's largest.

The industry FX committees run by each of the central banks will also require a formal commitment from the dozens of major institutions who sit on their panels and a new joint Global FX Committee will monitor implementation of the code.

"I would be surprised if a major wholesale market participant did not get behind the Code," said David Puth, the head of settlement bank CLS and chair of the committee of market participants who have funneled banks and other financial firms' input to the code.

"Over the course of the next 12 months, we will look for all wholesale market participants to adopt the principles."

UK regulators, who oversee the world's biggest FX trading center in London, are expected to embed the code in the new senior managers' regime for financial firms.

Deputy Reserve Bank of Australia Governor Guy Debelle, who has led work on the code and an earlier "preamble", said other regulators were likely to follow suite.

"Our (Australian) securities regulator is going to utilize the code as the standard they expect," he said.

"If that happens in the UK, given London's importance for forex, that will add a fair bit of bite to the whole process. In our case, I know that our securities regulator is going to."

The code also provided a list of disclosures that the new generation of algorithmic traders should make, including a clear description of their execution or aggregation strategy, fees, routing and sources of liquidity.

In a separate document, the Global Foreign Exchange Committee gave participants until Sept. 21 to lodge feedback on "last look" and whether the language on it in the code should be altered.

"Some market participants object to the use of last look, arguing that it is not necessary as a risk control mechanism and moreover that it can negatively affect the outcome for the Client," it said.

"Others view last look as beneficial for market liquidity and pricing."


(Editing by Tom Heneghan)

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