The code of conduct governing the $5.1tn-a-day global foreign exchange market has been toughened in an effort to reassure customers over the “last look” practice, an influential body has said.
The Global Foreign Exchange Committee, which is made up of central banks and big currency trading banks, strengthened the language in the code around last look, in which a trader can renege on an agreement with a customer at the last moment.
Confidence in the foreign exchange industry was shaken by a series of scandals in 2014 and 2015 in which global banks paid more than $10bn in fines for alleged manipulation. The recommendations this week follow a survey by the GFXC into the effectiveness of the voluntary code of conduct established in May 2016.
It found there is widespread concern that last look is “inconsistent with good market practice and not beneficial” to customers, the GFXC said on Tuesday.
The revised code now states that “market participants should not undertake trading activity that utilises information from the client’s trade request during the last look window”. Previously, the guidelines has simply warned that such activity would be “likely inconsistent with good market practice”.
In November Norges Bank Investment Management, the world’s biggest sovereign wealth fund, urged banks to do more to restore investors’ faith in the currency market, particularly around last look. Defenders of last look say it allows trading banks to resolve problems if problems emerge with a customers’ credit or the market moves drastically after the customer agrees a price.
Following the feedback, the “GFXC considers that stronger language around trading activity in the last look window is warranted”.
Most currency trading is conducted off exchanges between banks, creating a fragmented market that regulators have found difficult to police. Allegations that banks used knowledge of clients’ orders to benefit their own trading books eroded confidence in a market whose customers span corporations to hedge funds.
The GFXC, which was developed under the auspices of the Bank for International Settlements, also found that almost 60 per cent of those surveyed had fully read the code, and the majority said they would probably scale down or stop trading with institutions that do not commit to it.
Chris Salmon, the chair of the GFXC and the BoE’s executive director for markets, expects the code to improve the industry’s behaviour in the long term. “The priority now is on focusing on that commitment to the code and making sure firms follow through on their commitments,” he said.
Market participants, including banks, asset managers, trading venues, proprietary trading firms and market makers, are also worried about transparency because so much trading is conducted on anonymous electronic trading venues, the survey found.
Roger Rutherford, chief operating officer at ParFX, the forex trading venue, said the revised language “provided clear guidance”. “The code has been instrumental in kick-starting important conversations around market behaviour, ethics and transparency. I think 2018 will be a key year in which to redefine the rules in FX,” he added.
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