Transcript of Question & Answer Session Panel participation at the ACI FMA America panel discussion on the BIS Code

Looking forward to this evening, so I think first of all it’s probably helpful if Guy could perhaps just introduce what the roles were for the individuals on the panel.

Sure so well so I sort of sit across the whole thing and then David leads the market participants group. So just to provide a bit of background as to how we got here which provides context about what everyone’s doing here. We were given this commission by the BIS Governors just over a year ago to come up with a Code of Conduct and also to come up with ways of generating greater adherence to the Code of Conduct. So reflecting that, Simon’s job is about producing the Code of Conduct and Chris’ job is leading the team which is developing the adherence mechanisms. In producing the Code of Conduct, it’s very much a public/private enterprise and hence on our side, there’s 16 central banks from the 15 major currency areas, but then on the market side, there is David’s group which spans the same geographic distribution but across all sections of the market, so 30 odd people from the sell side, the buy side, platforms, ECNs, and non-bank participants. So pretty much the full breadth of the market, both globally and structurally.

That usefully segues into a question for you Guy in terms of there is a vast or a vast number of topics that could have been covered, how have you selected those that went into this first section and what can we expect? David mentioned there prime brokerage, some of the e-trading, what’s been the split? Why those topics in the first round? What comes next?

Well we had to split it somehow or another, because we can’t do it all at once. But so we did cover off in the first phase which was put out today, some issues where we thought the market was particularly uncertain and needed guidance on, to try and get the market to a better place sooner rather than later. And so the two most obvious ones which were included are around information sharing where the sense we had was that information sharing had moved to a very, I suppose for want of a better word, conservative point, very risk adverse point anyway. Where there was a great uncertainty about what could and could not be shared and so we felt the need to provide some guidance around that or some principles around that so people could operate with somewhat more certainty than they had in the past as to what information could and could not be shared. And I emphasise, information can be shared, just can be shared appropriately, whereas I think it had gone to the point where people were reluctant to share anything because of uncertainty around that. And our sense was that that was affecting liquidity in the market and to that end, some of the guidance we put out … The principles we put out around information sharing today are to try and address that and hopefully improve liquidity in the market.

The other area where there was probably a need for guidance sooner rather than later was around various aspect of order-handling and that’s another aspect that we’ve covered off in what we’ve put out today. As David said though what’s still to come, clearly some issues around which there is controversy so and particularly around e-trading and most obvious aspect of that would be last look and that is something which we will definitely cover in this second phase of the code. But once having been given this commission last year we weren’t going to disappear for a couple of years and then suddenly come down from the mountain and drop this thing. We thought it would be useful to be able to get stuff out there sooner rather than later, and hence the objective of splitting it up into two parts.

I suppose Guy a question for you when you set out on the journey of developing it, it could have gone down a very granular approach in terms of detailed sort of guidance around particular order times etcetera, and what’s notable is it starts with the leading principles and sort of cascades down from there, what was the thinking behind principles as the opening gamble?

So basically we set out not with the aim of writing the procedures manual or writing a rule book, for a few reasons; one of which I’ve said possibly those who’ve heard me say it, said ad nauseam, is that from my point of view I think detailed rules are much easily arbitraged than principles. So if you articulate rules then, one it actually turns out it’s incredibly difficult because you have to go down into so many and consider so many situations, so it almost ends up being counterproductive. But actually they’re much more easily arbitraged if you set them out like that. If you set out higher level principles it means that people actually have to think about whether their behaviour is consistent with that. Individual entities in the market, individual firms in the market can take the principles we’ve got and develop procedures manuals which are consistent with them and provide that greater detail. But as I said the main thing is that if you’re sitting there on the desk on either side of the market, then you actually have to think about whether your behaviour is consistent with that. Now that is sometimes a slightly foreign concept to FX traders to think, but anyway putting that aside … Well it’s a foreign concept to me too.

Present company excluded.

Present company excepted.

There is a free drink, just be careful you might be out on your ear Guy.

That’s right. But anyway the idea is that so one … A couple of things like about the principles and something that Simon held the thing up and it’s not very big.

It’s very good though.

I know but actually and something I said earlier today, so it’s written in plain Australian so anyone can actually read it. But well reasonably common vernacular, it’s written in plain English. It is a readable document, it is not hard to read, I think it’s reasonably easy to understand what we’re talking about, so it’s not obtuse legalistic language, as I said I do think and I suppose others are ultimately the judge of that, but I do think it’s written in plain English, so it’s readable. And that’s the other important thing about articulating it or developing it the way we did is it makes it something that’s readable. It is not going to sit there, I hope it’s not going to sit there on someone’s shelf because it’s too dense and they’re just not going to be bothered to read it, it’s actually not too hard to read it.

So individual companies may want to take that and develop more detail inside what we’ve got or underneath what we’ve got, but I think it certainly provides a pretty clear structure and understandable structures as to how we expect the market to operate.

So a question then for, probably for you actually David given that you had the market participants group and you’re chairing that, and for Guy as well perhaps. You hear some criticisms that perhaps this a Code developed by … In the majority by sell side, that’s where the problems were is this a kind of a fox in the hen house type of approach, i.e. we had the problem in the sell side but we’re writing the code to solve it etcetera. I think you hear that criticism is that fair; do you think people were engaged across all different groups?

I can say unquestionably that all sides were equally committed to getting this right and I think for the sell side of the market place everyone recognised the stakes were very high to get it right, to get it done properly and I think the buy side in general saw this as an opportunity to say let’s work together to find a better way to make the market a more liquid one.

One of the things that has come through from the outset and I have said this, is I think everyone on the market participants group saw this as a truly unique opportunity but equally a responsibility to the market place. This is a proactive step forward for the foreign exchange market and in that way it’s very unique, we can look around the world, there’s not a market as large and as deep as the foreign exchange market is and we’re taking a very strong offensive step to make the market a better place.

Want to add anything to that Guy?

I mean and Chris alluded to this earlier but I would say the general feedback I get is that the market is very supportive of this. As David said, they see it as an opportunity to move the market to a better place and the engagement we’ve had from people not just on the market participants group but certainly through our individual FXCs and I can speak most directly about the Australian FXC it’s the engagement there and the interest there and the enthusiasm I think is actually probably the best way to describe for it as an opportunity to move the market to a better place and move it away from the incidents that have happened over the past few years. So just coming to your point on the sell side code I mean I think we’ve been very conscious of that, the makeup of the market participants group I think is pretty balanced across the whole spectrum of the market, so there’s very much the perspective coming from all sides of the market. It’s not just coming from the one side. And again as we move forward into the next stage, particularly around electronic trading I think that’s very important we’ve got all the perspectives reflected there.

Just taking that forward as well I mean one thing we haven’t covered off obviously many venues are involved in the market these days, does the code include them in the process as well?

Yep.

Simon and David have probably got some answers to that.

Okay we spent a lot of time on that and …

Should we just repeat the question just so everybody …

It was a pretty complicated question but there’s a concept out there called principal which is a well established concept. It means different things in different jurisdictions which is one of the issues we had. What we don’t want to delve too deeply into some of the business models that are out there, because we want this to be pretty strong across business models, so the notion of principal that we had, had you taking on risk in some form and there could be some discretion. Sometimes you’re not taking discretion but you could still be a principal and that’s an indirect way of answering the question you just gave, do you want to?

I want to emphasise again it was certainly in our top 5 most discussed questions was this whole concept of riskless principal and there are participants in the market who don’t believe that that exists, there are others that do, and when I referenced earlier the concept that there is agency-like behaviour in a principal model I think we need to accept that. And as Simon highlights the level of granularity that we took this too was to a level that we felt could offer guidance to the market place but not a requirement in terms of the way people approach things. So a very challenging question and I think the principles the way we’ve established them actually do cover most of that concept without stating it as such.

And the other thing I would add is that as we move through the second phase and deal with the issues around electronic trading and with the other part of your question I think will be picked up and we say quite explicitly in the text we put out this morning, that execution section may well change. I don’t think the principles are going to change materially, but there will be more material added to that which I think will get to some of the points that you – that were certainly in the second half of your question. So some of that is still to come but I think the overall concept of principal, agent, I mean that’s principal with risk as Simon mentioned there which is not, sorry principal with discretion sorry, let me back up, that we articulate there I think they are still going to be robust I think to what we’ve got in the second phase.

So we didn’t want to be pinned to a particular legal system, accounting system or anything else because it’s a global code. And if it’s a global code you can’t pin it to a legal or account system.

Hi I’m Michelle Fleming I’m with the CLS Bank; I have a question for the group. Incredible effort, extraordinary result in terms of the clarity of the document, any early thoughts on how you’ll measure success?

The only thing I would say is if incidents occur in the future that doesn’t necessarily constitute failure. If there is more visibility around that from either the firm itself, self identifying that or its counterparty and using the Code as a reference point for that, I would regard that as a success not a sign of failures.

Hi, I’m from Bloomberg News. So I’ve talked to a few people in this room and in the markets today and the sense is that this is a very well intentioned code, but with no sanction and on a voluntary basis, is there some sense that maybe you’ve let the industry off the hook here?

So we are very clear that there with the adherence mechanisms are not fully articulated as Chris said and they will be, and I would say over the course of the next few months there will be consequences, we’re looking at what sort of consequences that can be from both positive adherence and negative, non-adherence I suppose. Our job is not yet done, we’ve still got another 12 months to come up with the complete code. I would say this because we’ve been doing this, but I think this is a document which serves to move the industry into a better place. I think as Chris alluded to earlier, various regulators may take this into account in the way they look at the market as well and we are not regulators so we don’t by definition almost don’t have teeth.

Ern Sherwin Digitech Pricing FX software. Can you just give me a little bit of sense of flavour how are the politicians, the governments interacting with you what’s their reaction? And the second part of the question can you give me a little bit more sense how are like the BRIC countries, Mexico, will this help them evolve? Is it a good guiding tool where they need to go? Background of all of this is uncertain in the market, mistrust, liquidity issues in certain currencies, the term emerging markets always comes around, so can you highlight maybe a few of those aspects please, thank you?

You Guy.

I mean I can certainly answer the second quite easily which I mean we have Brazil, India and China active members of our group in particular India actually but also China. And I gave a talk in China at a conference hosted by CLS last week, where my sense from talking to my Chinese counterpart is they are very much using this code, will be using this code as a guide to where they want their market to be as it becomes more integrated into the global FX market. So in that case I think yes they are as the market evolves become integrated into the global market they will be using this as a guidepost sort of behaviour they’d expect from their market participants. In the case of India and Brazil who are markets which are already a little more integrated into the global market I think they’re looking at adopting it.

And Mexico is involved.

And Mexico sorry is another active participant and I’m not sure where you draw the dividing line on emerging markets anymore but Korea is another participant in our group as well. As I said we have the 15 largest currency pairs in the world, currencies in the world sorry, not currency pairs, which gets us both advanced and emerging currencies in there.

On your first question the politicians, I mean we’re operating under the auspices of the BIS Governors but the maybe getting too much into the nitty gritty of the structure of the regulatory community but I mean it’s under … The FSB, Financial Stability Board, which encompasses central banks, securities regulators and Treasuries or Ministries of Finance, this is sort of very much work that is endorsed by them as well.

And we think there may be at least one political candidate who uses the slogan “Make FX great again”, so we’re working in that direction.

We should almost finish there. That does just raise one question for clarity, Simon you could answer it actually because we’ve got the UK here in Australia as well. Does this Code … Is this now the Code does it render the other ones obsolete in the NIPS code perhaps or the codes used in Australia etcetera? Where should market participants look now, is this where they should focus their attention?

As you know there is about six codes out there.

Yeah.

We had one in New York, there’s the NIPS Code, Singapore, Hong Kong, Tokyo have one, there’s the ACI Code. Those are all really important, so you shouldn’t look at this as well we never read any of those, there’s a lot of useful information in those codes. If you look at the history they’re really important in the growth of the FX market, so the 60 best practices were important, the ACI model code I think had really positive impact on how the market works. But it’s much better to have one code for this market where it’s the same product wherever it’s traded, wherever it’s traded. So in New York we will be directing our FXC moving forward to focus on the evolution making sure that this code is as robust and strong and meets the needs of the market as we can going forward as part of the international effort that we have and I’d expect other countries to be doing the same thing. There’ll be some legacy aspects that are still important, I mean a lot of the back office work that was done has been very important to the market, and that will still be available for people to look at. Because if you look at the gain the weight of all the codes and put them together it would be about this high, and we still want that to be available to people, but we want the code to be fresh and on the edge of what’s really critical for market participants.

I would add, I mean our expectation is people are going to evolve their behaviours toward this over the … We’ve got the information report out today and then there’ll be more in 12 months’ time. But at the same time, nothing we’ve got there I would regard as inconsistent with stuff which is out there. So in Australia we use the ACI code as most of you probably know, and so but what we’ve written here builds on that and Simon said we actually deliberately looked at the existing codes and there was some chunk of it which is basically harmonising the material which is …

Confirmation settlement in there.

… which is already in the existing codes and so in confirmation settlement I wouldn’t … There’s no so much which is new there, that’s very much a harmonisation of what was across those existing six codes. And so I don’t we’re expecting people to evolve their behaviours towards the practices articulated in this code, but it shouldn’t be inconsistent with anything they’re doing if they’re following the existing codes.

Well Garry McNamee from Point 72 Asset Management. I just had a question I know this will be undertaken more in your second phase but in terms of last look, are there any ideas being floated around about that, and also would there be any ramifications to the cord it spreads as a result?

Yes there are ideas being floated around about the last look, there are no shortage of them.

[inaudible] of the answer to your question.

No I think there is absolutely no question that Last Look is a topic that will get a lot of attention. It has already gotten a tremendous amount of attention and I think what we hope to do as we have in the first round is through transparency and through discussion find principles that will apply directly to last look that could be helpful to the market. I don’t think anyone – if anyone has an illusion that we will outlaw that as a result of this someone’s going to outlaw last look, that’s not going to happen; last look is part of the market place and it’s can we put it in a form that can be helpful to the market and have market participants to understand how it can be used effectively.

On a very competitive market and out of achieving that there’s going to be things that people could describe in a way that look strange but promote a competitive market.

I think pre hedging would be a good example of taking a practice that is out there, that is part of the market that I think we’ve shed some light on.

One more question that you want to ask and one of the … You ask your question and then we’ll take the gentleman. One microphone to go over there and then one from Eva at the front here.

Gordon Hanwiff from Triana; what do you see the biggest change you’ll see, two months, two years out after the release?

People heard that, what are the biggest changes, two months, two years out and that probably sort of comes down to the success question as well.

Get weekends back.

Successful market review.

I think one of the more obvious things that will take place is I think that the code will become a standard mandatory reading for everyone who enters the market and I think that road map is a very effective road map to have a single document that can be used in at least 16 jurisdictions around the world with literally thousands of organisations who can use this as a way to indoctrinate people into the right way of the market behaving. So I think I fully anticipate that that will happen, we’re making it easier for people in doing it this way. People train in multiple different ways and this provides what I think is a good guide.

I guess to add to that a rather good outcome would be in two to three years times if firms feel it’s important they can really demonstrate to their peers that they’re adhering to the code in a way which is credible and meaningful so it becomes some type of coat market for participation in the market and that would be a good outcome.

The average FX market participant should think it’s useful and be able to explain large parts of the code if you met them at random that would be a good outcome as well. I don’t think that’s true as some of the codes out there right now.

And I can I just add one in coming back to something we talked about right at the beginning again if I go back to just take the particular example around information sharing where I feel that the market isn’t in a spot which is ideal in terms of market functioning, I mean that’s something coming to your two month horizon where if this is able to give people greater surety around that then that is something which I can see improving liquidity in the short term eventually.

I suppose Guy a question for you; I’m assuming you’ve taken on the mantle to do the next phase of this, with the team.

Haven’t taken on I’ve been given, that wasn’t a choice.

What are the next stages, we’ve touched on it, is this previous version, do you want comments from the help of questions already coming from the floor probably will help focus on areas, what comes next?

So what we’ve put out today and I think Simon may have mentioned this earlier or someone mentioned this earlier. So we regard that as pretty robust but that said we are still welcoming feedback, we don’t want to revisit, I think David articulated this, re-open issues that we’ve thrashed around and ended up in a place which we were able to reach consensus on. But if people feel there are issues that we’ve just plain got wrong or plain missed then we’re open to that feedback, so that’s in terms of what we’ve got out there today and there’s a number of mechanisms for doing that either through your local FXC or the members of the group either on the MPG or on our side on the central banks are on the group and that information’s available on a website hosted by the BIS.

They’ll be a mailbox.

And there’s an email address that out there and it’s not mine.

It will be a New York Fed domain.

Yes.

So we’ll have the joy of seeing the gushing praise.

So anyway that’s that opportunity for feedback. As we develop the text through phase 2 we will go through the same process of promulgating it through the various foreign exchange committees and through the other jurisdictions who don’t have foreign exchange committees and through the same sort of forum that we did over the previous 12 months. So it will give large parts of the industry plenty of opportunity to comment or most of the bulk of the industry plenty of opportunity to comment on the text as we develop it over the next months, so there will be plenty of looks on even the last … There will be one last look before we finalise this thing in May next year. So as I’ve said we’ve tried to make it as inclusive as we can over the past 12 months that’s very much the intention that needs to continue to do so over the next 12 months.

Very good well I think we’ll leave it there because we’ve just gone past seven o’clock but I think from my side having to be in the industry to seeing this come from where it started to emerge I’d just like to congratulate all of you for leading it obviously with the various committees that you had I think it’s been a piece of work that has clearly led the way for the industry, I don’t think anyone reading it can be in any doubt as to what its intention is and come away from it as Guy said it is written in plain Australian which helps and I think it is to be admired what has been achieved by all of you, so thank you very much.