Transcript of Question & Answer Session Remarks and panel participation at a Thomson Reuters industry event - Examining the FX Code of Conduct (Phase One)

Thanks James. Just to provide a little bit of background about what we're doing and why and how. So first this is the Code as it stands at the moment with inspirational global cover. You see that that wasn't where we spent a lot of our effort. So we released the first phase of the Code, which is roughly the first half of it, in New York in May, so about six weeks ago or so. So let me just talk about how we got to where we are and why we're doing it. On the why, it's basically reflecting the lack of trust in the FX market, that's, I think, come to pass going back a few years now both between participants but as much between the market and the public at large. The BIS Governors just over a year ago commissioned us, me and my colleagues, to come up or to develop a Code of Conduct working with the industry and also develop ways to get industry to follow said Code of Conduct. As you all know, we've had codes of conduct in the industry for a while, part of the problem is there being ‘codes’ rather than ‘code’ singular, but they've been there and wilfully or otherwise they've been ignored at various times over the last few years.

So anyway we've been tasked to come up with this Code and the group who's putting it together which I'm chairing, consists of the central banks or the people who are basically head of markets of the central banks of the largest 15 currencies in the world, that's both developed and emerging. It includes China, Korea, India and Mexico and Brazil from the emerging side of things as well as the major developed currency centres. But it also includes a group of market participants that David Puth from CLS, who I'm sure you all know, Most people it turns out, have actually worked for David or with David at some in their life in the industry as best as I can tell. So David is chairing this group of market participants which is again drawn from around the world. It's also drawn importantly from the whole cross section of the market. It's got the sell side obviously, it's got the buy side and a reasonable representation across there in terms of corporates, asset managers. It's also got non-bank liquidity providers including the people who are, according to at least the Euromoney Poll, number 8 in terms of liquidity provision which is XTX on the Group.

We also have a few other non-bank liquidity providers there. We've got platforms, so Phil Weisberg from Reuters has been doing a lot of work on this and is currently doing a lot of work on drafting the Code. So we've pretty much got the whole spectrum of the market represented and fairly evenly distributed both across the parts of the market in terms of role but also across the globe. We've got EM participants as well as developed market participants. In Australia Hugh Killen from Westpac is on the Group and has also done a hell of a lot of work over the past year and has a fair bit to do over the next year.

So what we've done is we've put together this first phase of the Code over the past year. We put it out for comment three or four times, got about 6000-7000 comments which we considered and reflected in the draft. So we've given it a pretty wide circulation. If you have further comments of substance we're still open, certainly willing to hear them. The first phase of the Code covered things like information sharing and execution as well as confirmation and settlement. In terms of execution it was very much around order handling and, in particular, acting as principal or agent or somewhere in between principal and agent which is most of the market. Around information sharing we wanted to do that one sooner rather than later and get stuff out there because the general sense was, including directly from us as central banks participating in the market, that information sharing had dried up.

So having gone from a position where too much information was provided, given the uncertainty out there, a lot of participants had decided that the safe thing to do was to provide no information and that was clearly impairing market functioning. So we felt it desirable to get some guidance out there as to what we regarded as appropriate guidelines for information sharing and so that's in there, in this first phase of the Code.

In the second phase which is currently underway and we're meeting in Frankfurt on Tuesday to flesh out exactly how we're going to cover some of these topics. The thing that most people are going to be interested in, in the second phase is the stuff we're doing around e-trading and around prime broking and around platforms which is where Phil comes in, so appropriate guidelines for trading on platforms. That work has commenced. We intend to have the first draft of the second phase out around the beginning of September out to the market participants for comment. Then there will be similarly at least another two iterations for people to provide feedback on it before we get to something which is close to final around about March next year. Then we're putting it out the whole shebang in May next year in London.

At the same time as we've been putting the Code together, we've been doing work on trying to work out mechanisms to get greater adherence to the Code. I know that's still very much a work in progress and we're working with market participants on some aspects of that at least. This document isn't a legal document. So we're not regulators; most of us at least aren't – I'm not a regulator. Most of my central bank counterparts aren't regulators, a couple are. It's a Code of Conduct. It's not legislation. It's not regulation. It's very much principles-based. It's not rules-based. If you read it that's I think pretty apparent. So the question is, how do you get adherence to something like that as it doesn't have legal standing? The main overriding motivation I think is to ensure that there are consequences from people not following the Code. The one which tends to focus the mind the most tends to be financial consequences, I think. They don't necessarily have to be negative financial consequences, clearly the odd billion dollar fine has focused a few peoples' minds, but they can also be positive as well.

I suppose there are basically three different legs to the adherence as least as we have it at the moment. One is in terms of us as central banks participating in the market and we've already said in May in New York that in our own trading activities with the market we expect our counterparties to be adhering to the Code. Similarly in terms of membership of foreign exchange committees, we are looking at having that tied to adherence to the Code. The foreign exchange committees themselves have already endorsed the Code. The second leg is really around market based adherence mechanisms. This is basically for the market and so the market we think itself has a role in ensuring adherence in terms of the way market participants interact with each other. The third is while it's not regulation, we are certainly talking to regulators including in this market talking to ASIC about how they might use the Code in their oversight of market participants. That conversation has certainly happened already in London in terms of the FCA using this.

So as I said, they're basically the three legs. We are still working out exactly the detail around that. We'll certainly have that out by the time we release the whole thing in May and give people some idea about how that's going ahead of that so that we can hit the ground running following May. As I said this isn't regulation, it is principles-based not rules-based. I've said on a number of occasions I think the advantages of doing that is that if its principles-based, it makes people think about what they're doing rather than just a box-ticking exercise. Similarly, if any of you have had the task of trying to write codes of conducts for your own internal or procedures manuals around conduct for your own firms, as soon as you start going down into detail it actually gets pretty complicated and everyone comes with, ‘What about this situation or what about that situation?’, and trying to be comprehensive and cover off everything is an impossible task.

Also the more precise you get, then someone has then tended to say, ‘Well, if that's not explicitly prohibited then it must be okay’, which is not necessarily the way to get best practice in the industry I think. If you make people think and discuss about how actually to implement the general principle, you are getting the market to a better spot. As I said the Code is what it is. It's a principles-based code. It is not a procedures manual. How individual firms then incorporate that into their own practices may involve putting it into a procedures manual but that's not what we're doing.

So as I said they're the two main things. We're starting work on the second phase. The first phase is out there easily found. You can find it on the Australian Foreign Exchange Committee's website which is not too hard to find. As I said, we are still open for comment, particularly comments of substance where people think we've either got something not quite right here in a material way or we've missed something. We're commencing work on the second phase. People will start seeing what that's looking like around about September and at the same time as I said, we're moving forward on the adherence side. So let me finish there and head over on the couch or chairs.

Thanks very much, Guy. You mentioned at the beginning of your opening remarks that the Code lacked a glossy colour. The good news is Thomson Reuters has prepared one with a glossy cover which you'll all receive at some point in time which really discusses the impact of the Code on the buy side. So now I'd like to invite the panel to take their seats please and introduce John Noonan, who will be moderating the panel this evening. Many of you will know John is director of IFR Markets Foreign Exchange Asia. John has over 30 years of experience in foreign exchange markets through analysis, trends and reporting of major events. He's extremely well placed to moderate tonight's panel discussion. John?

Thank you James. I actually started in the foreign exchange market in 1973. There's probably a couple of you who probably weren't born then I would imagine. It sort of Jurassic Park and I'm not going to go down memory lane here. I'm actually going to lead to a question on this. It was a completely different environment than it is today. It was the pre-bonus era. There were no systems. Most deals were done by phone. Phones weren't recorded. Your word was your bond. The senior management of banks had no way of monitoring what was happening on a day to day basis and believe or not, not only wasn't there real time obviously monitoring of trading, there wasn't even daily monitoring of trading. Re-vals were done once a month and in those 20 or 22 trading days in between re-vals, senior managers of dealing rooms were the only source to senior management of information on how things were going, what was happening, were there any issues, were budgets being reached etc. In terms of monitoring breaches like banks would have overnight limits and dealing limits in how much they could do, they didn't have the systems in place to do that. They relied completely on the dealing room itself, the culture of the dealing room itself, the senior manager to monitor that because if you wanted to go outside your limit, the old ticket's in the drawer, park positions with friends, square up and wait until 5:00 and reinstate positions. There was no way banks and institutions could handle that.

Externally, when you're dealing with your counterparties, again there was no tapes on the phones so you'd be calling up. You deal with brokers. Brokers at that time weren't taped either. Your word was your bond. Confirmations would happen at the end of the day. Sometimes it was a bit late so we'll just confirm tomorrow. There were discrepancies and they were always handled amicably because your reputation was everything. So it was a completely different environment and codes were adhered to and they may not have been written in stone but for instance you couldn't renege on trades because of your reputation.

There was incentive for being very, very straight and being very honest and forthright and credible because senior management of the banks relied on that and so they rewarded that. So when you started out in the trading room if you wanted to be promoted, if you wanted to stick around, they had to build this sea of trust because they relied on you. Obviously that changed pretty drastically. Systems became better, they didn't have to rely on dealing room managers to work out what was going on with the trading flows, or systems would pop up any discrepancies and of course the bonus came in. The preference then was, well it doesn't matter if your reputation is too bad, if you bend the rules a little bit as long as you made a lot of money and you got paid big bonuses really it didn't matter too much. It was okay to sail close to the wind. So these incentives have changed. I think, sorry for the longwinded start, but my question I'm going to ask the panel in general is that putting in a code of conduct, a single code of conduct I think is a great idea.

Obviously there's been a tremendous amount of bad press for foreign exchange and one has to be put out there. I think the culture has gone probably a little bit too far down the cowboy route at various stages. So I think it has to be brought back to that. Can it be done by threats alone of consequences or does it have to be incentivised? In other words, should good behaviour be rewarded as it was before the bonus culture or is it you can't reconcile it with the bonus culture? Colin, would you have a comment on that?

I find it interesting that people would be rewarded for doing the right thing. That's maybe a stretch too far but I do think that we need to get some sort of way, as Guy referred to, some teeth around the Code. The sad facts of life is you've got to make people scared and you go to give them pause for thought. You've got to come up with some way of actually doing that. Lest we forget we've got two FX traders in court this week in London claiming unfair dismissal. We've just had another one had a case resolved. These things can go on for months and they reflect on the industry, on the organisation and the individual. So anything that brings some clarity should be welcomed. In terms of giving it teeth, I think a big bother is the adherence but I think we can do that. It has to be done probably on something like a demerit system.

What about you Guy? Was it discussed with the various institutions that you …

I mean, it is. It's currently under discussion. Its reflected in the contribution that the market participants have made to the drafting of the Code. There's a large number of people in the industry who are not happy with the public perception of the industry, who want to get it to a better place and are working very hard to get it to a better place. The desire at least, not necessarily incentive, the desire is there on the part of the bulk of market participants to do that. Hence they're happy to contribute to something like this, which has got some chance of doing it. It also means I think if there's a common understanding of what good practice is across the industry it makes it easier to push back on practice which isn't good practice when you see it. Whereas I think in the past some of it was just what were, coming to your description of the way it used to be, I think it was a reasonable commonality of understanding of what goes and what doesn't go. So one of the other things I think which was lost was that, a common understanding of what is appropriate practice and what's not. I think one of the things we're doing here is at least providing a focal point for people to regain some common understanding of what is appropriate practice.

There's something else John sorry just on top of that, by getting the adherence piece right you can protect the people in the industry that are doing the right thing. Everyone out there is scared. People are worried about ‘Can I say that? Can I do this?’ As Guy said, the market to a degree, is ceasing to function. Therefore by actually getting the adherence piece right and giving it some teeth so that you know you can go after the people that do wrong, you end up helping the people that are doing the right thing.

It's certainly incentive for the large institutions. I mean the ugly headlines and as Guy said, the billion dollars cheques they have to write out every once in a while is obviously giving them motivation to bring back the code and ethics. Les, if I could ask you what are the challenges for implementing some of these codes, putting them in systems and what will the drain on resources be for monitoring ethics and codes etc?

Sure. Well, from the buy side perspective I think it's interesting to note that there's been many codes around for a long time. In fact I was involved a code that was introduced into the Australian market back in ‘86 about confirmation of FX trades. People have always tried to do the right thing. I think to see the expansion of the requirements of model codes or global codes now is a good thing. When I moved from the banking side to the buy side I got involved with AIMA who actually are introducing a number of sound practices codes globally. The issue I suppose from a buy side perspective is the fact that you have to try and meet those codes on a regular basis because you're looking after other people's money. Other people come in and then they perform a DDQ on you on a regular basis and they ask you whether you are complying with those codes and the penalty would be that if you weren't achieving what would be expected as best practice in relation to those codes, they would actually potentially redeem their investment and your fund and there's a financial penalty there.

One of the things is that as the codes have become more complex obviously with small hedge funds on the buy side and even some bigger hedge funds is the fact that it takes a lot of resources to implement this and manage it. Unfortunately at the moment many of the Codes are still in paper or on PDFs or distributed in PDF so they tend to be something that's written. You understand but there's a risk that's put on file or put on a shelf and it gathers dust and people come along say, ‘Do you adhere to that code?’ You say, ‘Yes.’ It's basically a ticking of a box exercise. So I think personally that the fact is what we need to do with regards to these codes which the buy side is very supportive of, whether they're issued by whatever authority is the fact that we need to actually be able to manage it and implement it and monitor it and measure it. How we digitise is a question. I think that's where we need to move to next.

There's many different codes that are issued by many different authorities and from a hedge fund perspective you are – I'm monitored by ASIC. I'm regulated by ASIC. Some of the aspects of ASIC, some of the requirements on me, mirror some of the things which are in the model code. Therefore which one do I follow and what would be nice if I can consolidate that in some fashion which is not an easy job. If I could digitise it and if I can manage it and have it affirmed automatically so that people understood what they were doing and if they didn't understand what they were doing they had a resource or a recourse to ask someone what they couldn't understand. When a review came around, I could provide them a digitised report rather than the panic of running around trying to find signed documents. If something does go wrong and someone did tick a box, that they read and understood what they were supposed to be doing, I'm shifting the accountability to that individual rather than relying on a document that's written PDF style and filed on a shelf somewhere.

So I'm going to pick up on a few of those things. That is actually what we're trying to – the digitisation thing is one thing we're actually looking at seriously. I think there's some chance we'll have something along those lines as part of the adherence. That is something we have thought about. The other thing I think partly coming to this point, so one thing at least on the FX industry where it is moving from a number of codes into one so that's not across the whole of FICC by any means but at least for FX you got less to worry about, only one. Another point I just wanted to make is that one thing we've stressed repeatedly is that to make sure that the Code is applied proportionately. So not all of the Code is relevant to all parts of the industry. It's a question of making sure that the parts which are, are applied appropriately. Including if you're someone who only has a sporadic interaction with the market what's required of you versus someone who's in there all day ever millisecond is slightly different or is appropriately different, let me put it that way.

There are some parts, in saying that what we're not saying is if you're only in there once a month but go in there and abuse the market once a month, that's bad whichever way you look at it. You're not just, because you're only doing it a few times a year, that's not too bad on the proportionality stakes. No, no that's bad. So we're mindful of that. I suppose the other thing I would say is that this thing is short. It's only half of it. The first half is short and the second half is also is going to be pretty short. It doesn't actually take that long to read. I've said on a number of occasions its written in plain Australian so it's not a – you know, an FX trader can understand it, I will assert …

A spot trader?

I've got Mr Dolan here and I've given it to him and he can understand it, who's my FX trader. No disrespect to Dave but I would claim (although I would claim this because I wrote it), it's readable. It's both readable and short which I think gives it some more chance of actually being read. Because we were very aware of some of the things you were saying. This is not something to go and sit there on a shelf. As Colin said actually he hadn't actually seen it in hard form before now but that's only because I've hit print and printed it out but it is actually an electronic document. We are looking at ways that as this thing keeps on evolving because it will need to keep on evolving as the industry continues to evolve. Basically having that thing done electronically and with digital ways of demonstrating adherence which evolve with it in a way which is not going to imply too much of a, for want of a better term, compliance burden on people.

Sure. I think nowadays with the way digital technology is that's much more achievable than what it was 15 or 10 years ago even 5 years ago. I think that's very important because not only does it allow people to review the Code if they're required to affirm they understand it, they can link to that code and read it. Then they actually affirm that they understand it. Then their management knows that they have read and understood, so they do something. We all follow a code in Australia which is called highway code but we all know that we speed on occasions. This is actually saying to people ‘I don't speed and I actually affirm I don't speed.’ Now they may speed and they may just affirm that they don't speed but at least that you know that they have read what they are supposed to do and you as a manager understood that you've done your due diligence on those individuals who work for you and understand what they are allowed to do and not allowed to do.

On the consequences side of things. Are they dealt with internally, on recommendations of how they should be dealt with when there is a breach of conduct or poor behaviour or ethics that aren't shown or is there an idea somewhere to have a third party making judgment on line ball calls? Even looking through some of the examples that you gave for taking orders and that's a big issue, some of them are quite vague. Not the way it's printed out but I can imagine examples in my head where many interpretations could be made. How are those adjudicated?

Yeah. That's a good question. So I describe as what we've done is we've made it clear that some stuff is clearly black and some stuff is clearly white. But as you say there's a fairly decently large chunk of grey, particularly in things like execution and information sharing actually in between where it's not obvious. I would say there are two things. One, both internal mechanisms for picking that up and dealing with it but also I think one thing we are working on is also external mechanisms. So, you know, whistleblowing of some sort of another and then the question is to whom and that is something which we're still working out. Colin said something like demerit points or something along those lines. You still need someone to assess whether demerit points could be …

Which can build into an annual appraisal.

Pardon?

Which can be built into an annual appraisal.

Yeah. Those are the issues which we're basically focusing on over the next 6, 9 months. Clearly if it's something which is at odds with the local Securities Regulation then that's straightforward. What happens then, everyone should be well and truly aware of which that goes to the Securities Regulator but if it was something like this, as you said, you can think of examples which can go either way. Some of that is as much coming down to having that discussion within the trading room or with your own internal compliance and saying, okay, this is the way we think about it. It's not necessarily going to be one right answer to that.

So you can have errors, omissions, misconduct, gross misconduct.

Yeah, maybe, something like that and to that point one of the things, if we see examples of nonadherence I would not by any means regard that as a failure. If we see examples of nonadherence which are let go that I would regard as a failure but even self-identification of that I would regard as a sign of success not failure.

So in that instance, so you have errors which always occur, omissions, people who forget to do something or perhaps misconduct which is picked up by senior management or management and then gross misconduct. The individual who has done something wrong which is qualified as misconduct. If it's not acted upon, who is responsible? Is it the management or the individual?

In the UK that's now very clear because they have a senior manager's regime and management is …

And every senior manager is trying to get the hell out of their responsibility.

Yeah. But then that comes to in part, the question of have you got the right, coming to something you said earlier, systems in place that you can say okay, in the end I can't be completely responsible for someone going rogue but I can at least ensure that I've conveyed to them at least the way we do things. If they go completely at odds with that amongst other things I should have at least have something in place which picks that up sooner rather later, it's not going to necessarily stop it but they should at least be able to detect it.

The problem is though how do you deal with the commercial pressures because somewhere down the line this is going to go to, someone in the business is going to say well, there's a bit of a grey area but this customer pays us $4 million a year. Do I really want to hag that customer off and risk losing that volume? That's going to be the real challenge within the business. Is okay, is someone willing to turn around and risk potentially lucrative, and in some cases it could even be dominating business in terms of their revenue stream.

I agree that's very much the challenge.

That then would go to senior manager because they'd have that decision on that basis.

All the guys in this room would know that there's a Deal Committee. So something of that nature would go to a Deal Committee. Senior management would look at it. The guys in each of the firms here that have a presence in the UK or the US would know that they've signed up to a certain senior management and executive regimes that they're personally liable for. So there's a lot of that that goes on and they think a little bit more deeply these days about the decisions they make. If it does come down to an inappropriate decision based on a $4 million customer versus a billion dollar fine or personal liability, I know which one they'd be making today. So …

What about if it's a grey area where they're not sure there's going to be a billion dollar fine?

There's always a reference. There's always your compliance officers. There's always your in-house counsel, someone that you can refer to. Even talking to the regulator if you have to just to seek advice if it gets that far or if you're really not sure. So I think it's not a one man decision process as it probably was when we were sort growing up in the markets. But it is very different these days and I think that a guy who wants to make the decision by himself and possibly make the wrong one is slightly foolish in today's market.

Is that an error or an omission or is that misconduct?

I think that's where the grey area is. Someone may make a decision thinking they are doing the right thing and it's an error.

One of my answers to that, and it's not going to completely answer the question, is if you can come up with a reasonable justification for the decision you took that's okay. Someone else may come up with a slightly different interpretation, fine but I think if you can provide a coherent story as to … to pick one example, another thing I've spent too much of my life on recently is around the (London 4pm) Fix, right? If you decide that you were going to – so one of the things we recommended around the Fix a few years back was people charge appropriately for it. Mostly that's happened. And then to Col's point there's some chance of there sort of being a race to the bottom and in a few years' time those fees get competed back down to something close to nothing again. Well, okay, but then if a few years after that something goes wrong with the Fix and then you turn up to your local regulator and have to explain ‘Well we just decided that actually in the end we could ignore that and start going back to not charging anyone for the Fix again.’ It's like ‘Good luck with that.’ That is not going to work well as any ex-post justification when there was clear, I think, guidance as to what was appropriate.

If you're saying ‘Well we changed the way we did our execution of business through the Fix and we reckon a reasonable price for transfer of risk has gone from 20 bucks a million down to 15.’ Fine. That's a perfectly reasonable justification for that. So as I said if you can make a reasonable case for something, as I say, others might come to a different opinion or around some of the grey stuff but I think that puts you in a hell of a lot better position, well it's not going to completely absolve you of everything, versus what is a broadly wilful ignoring of stuff.

Part of what you're trying to achieve is to free the market up and one of my concerns with Michael's point there is if we go into a process where lawyers are involved it's never going to be a quick thing, you know, because on the basis they're paid by the hour. Are we then going to free the business up? I don't think we are. I think we're going to have a problem unless you can actually I guess, take a specific issue, separate it and say, right, until that time.

Sure. I mean you're playing right at the edges here. I think if you're going external. But most firms would have an internal counsel or someone they can refer to. It may not get to legal but you've certainly got a risk and compliance officer that you can have a chat with or even your boss. If you've got a deal with …

But is that risk and compliance officer going to be willing to actually make a decision?

No.

And I think this is partly the challenge that we face in terms of implementation industry wide, is it somewhere down the line somebody is going to say ‘Okay. I'll make the decision.’

Sure and that's what people are paid for as senior executives in organisations ultimately. Again as Guy said, you make a decision in good faith and you head down that path. If it slightly grey if you're really, really unsure again that's where you refer it up but surely people are paid – they're senior executives they've been around the traps a bit and they've seen a lot of scenarios that they can opine on. So I understand the issue and I'd say playing right at the edges, playing right to the rules until the referee tells you to stop. That's probably a little bit difficult to justify but there might be a grey situation where you need to make a call.

So therefore do you think management needs to, and I'm talking senior management, maybe not necessarily the people in this room but senior management needs to be able to give part of their big task is to actually to give confidence to their staff members that they can actually operate as normal. You take the fear factor out. We don't want everything escalated.

No that's right. That's exactly right but it is business as usual. But the guidance and the principles are what provides the confidence. So you know you're working within the guidelines if you provide specifics, then I think people can play to those margins and as I said earlier, you can actually decide not to because it's not on the left hand side of the road. It was actually on the right hand side and again playing until the referee blows the whistle. That's a little bit off piece but again I think it's about reasonability.

Of course the first thing we're always taught when we're playing sport is play to the whistle.

I'm the compliance officer of my hedge fund and I don't have confidence in myself to make that decision that you said about the compliance officer. I mean I have a mortgage and I have kids. I'm not going to make that call. I'm just not going to make it, right? Why should I make it? I'm going to look for someone else to have that responsibility. I mean I'm not the guy at the front office making the big bonus if the trade is done. I'm just getting the pay. I'm just actually paying my mortgage off. If you come to me and say I want to do this. You better make that decision now. It's like being in the back office 25 years ago when the dude used to come out to you and say ‘You need to confirm that deal now because my bonus depends on it.’ I'm not going to do it.

All right. But then I still think, as Michael said there's ultimately someone who's in the organisation who's going to be accountable. The other thing also I think a lot of what this is – you know, so there will be stuff like that which is at the margins as Michael said but the bulk of stuff actually I mean and some of the stuff we're providing is around just regular operation and making it clearer to people that this is sort of what goes. Also, as I said earlier, I think a common understanding of what goes rather than a whole bunch of varied understanding is …

I think that's a key point actually. I think we got a code here which is excellent. I don't think we should look at reasons for not following it. I think we should actually follow it and if there are things on the edges, fix it later rather than actually not do it because some of it's too hard. I think that's the point. You never going to get 100 per cent perfect every time but if you look at what was done 25 years ago, I remember being beaten up by the ABA in 1986 asking the banks to confirm foreign exchange rates against each other. Things have changed substantially and in 5 years' time things will change substantially more. So I think we don't want to push back on the Code on the basis that some of the things are hard. I think those things that are hard, put them on the side, don't restrict business but follow what you can follow.

The clarity is very, very good. I found it significant in one of the judgments of one of the unfair dismissals trials in London stated explicitly that in a given date in 2013 all staff were told this behaviour was inappropriate and from that moment on there was not one instance of that behaviour. But it wasn't clear to them before so providing clarity is a huge step forward.

And the demerit point you mentioned before, you know, I think that's important. If you get a demerit point in one organisation, you go to another organisation, you've got 5 demerit points. It's like losing points on your licence. I don't know how you actually implement that but maybe that's …

Well that's one of the questions we're trying to answer.

Also too, leading on from that right at the ground level in some of the examples you gave again order taking and handling of orders takes a fair bit of sophistication because communication between – a lot of clients wants orders handled differently. There's no one or two or three ways to handle whether its stop loss orders or limit orders, take profit orders, large orders whatever you want to call it. They have to be able to – it seems to be a stress on communication with the client clear, upfront, this is how we do our business. This is what we expect to make on it or how we're going to justify doing the deal. So obviously there's going to have to be a fair bit of education and training because somebody with one year's experience who has been around the edges a little bit, can't really – there's some pretty sophisticated communication that has to be done.

Yeah, I mean, that's probably why we do things like this, to be honest. But there are a few education offerings out there. James mentioned one at the beginning which in this market and there's obviously we're not going to endorse any one particular model on that front because there's one or two of them out there but they are looking to build off of what we've got. I think there is a decent education process to get out there so that people understand it. The other thing, picking up on one of the other things you just said then, is part of the other thing is that if a client comes to you and asks to handle an order in a way which is at odds with what we've got here, it's also to give you the confidence to push back and say, ‘No, actually that's not the appropriate way to do that.’ Then rather than in the past possibly that person may have just gone down to the next firm down the road said ‘Yep sure. I'll do that.’ It gives you a little more confidence that actually they can't do that and they can't go to the next person down the road because they'll get the same response. So it's as much an expectation, and it may well be that the client is asking something in complete ignorance and in which case then …

You're educating him.

You're educating the client. By the way I know the numbers belie this but there are female participants in the market and so we should – you know, it's been a very him/her/guy.

Oh right. Sorry.

Anyway, one of the other things we're trying to do is the side that gets to the culture of the market I think which is changing a bit anyway.

One thing that you didn't stress tonight that you have previously is that this applies to everybody in the foreign exchange industry and that involves clients. I'm sure there are plenty of people out there that have experienced certain slightly large buy side clients who always want to know everything about your order book but as long as you don't tell anybody else about what their orders are with you. I mean it's as age old as the hills. So we've got to educate some very big and experienced clients and say actually no, we can't do this anymore.

I think that's sort of going okay. That message is getting out there because I think actually over the last couple of years it's been the opposite, the information flow has dried up pretty much to nothing. It's more saying actually there is some stuff which is useful to convey to people to give some idea of, sorry, to help market functioning because another question I often get asked is whether a code of conduct is going to worsen conditions in the market. I say no. What we're trying to do is actually make conditions better than what they've been over the last few years by giving people a bit of clarity about what goes and what doesn't. Actually trying to address some of the dysfunction in the market that's occurred in recent years as people have got very, you know, the sort of fear that some of you have mentioned earlier.

Colin, a question for you. We were talking about it the other day and Guy referenced it earlier about stage 2 that's going to be another in May next year or whatnot, what do you consider to be the key challenges for stage 2?

I think the key challenges are around the adherence in electronic trading. It may sound slightly strange but I don't think the problem in our industry going forward is going to be with the banks. I think the banks are pretty much on the side. They've all taken their $10 billion shock to the system. The adherence codes within the banks that I'm speaking to are a lot stricter than the code of conducts and as Guy said before this is a baseline for conduct.

I think the real challenge is, how do we reach the smaller players in industries, that may be in the fringes of the industry as to Michael's point. How do we reach the archetype of four guys in a garage in Nowheresville, Arizona who are latency arbs beating the hell out of the market via CME and EBS just by virtue of where their services are located? Getting to those guys is a real challenge. The PBs can play a role but I also think the platforms can play a role as well because obviously so much of this trading is anonymous.

How do you know as a liquidity provider that your counterparty is abusing the hell out of you? How do you know who they are? I think maybe somewhere down the line this is where the platforms have to maybe step up and take more responsibility and say ‘Okay, we are going to monitor behaviour much more strictly on our platform.’ One of the punishments could be you will be identified. If you break the rules you will be identified to all LPs. The challenge will actually for some of the smaller platforms because all of a sudden they're taking about putting in a big compliance unit.

Yeah, but so, I mean my vision which may be a pie in the sky one, is that I don't think, you're not going to completely eliminate that. But if you have some core of the market where people can be confident that this is the way the market is going to function and hopefully that core is reasonably large. It's not going to be every single platform out there but if you're pushing that behaviour to the frontiers where they sit there and pick each other off, okay, could probably live with that …

I think the problem is though, Guy that you've got …

I mean the separation is nowhere near as seamless as …

The smaller firms, typically are high frequency especially in the States. Actually they're a larger proportion of the market than maybe they would normally be.

But I still think it comes to your point and that's one of the things we're picking up on in terms of the platforms is if you have these sort of rules of engagement. You've already seen some rules of engagement on platforms where people would say, ‘Okay if I monitor this sort of behaviour then (a) I'm going to start widening the spread on you or (b) I'll start randomising the price feed for you or ultimately I'll just cut you off.’ I mean, you can do that.

Yeah, the platform can.

Yeah.

But the LP can't because a lot of time they have no idea who it is.

Yeah that's right but maybe also getting a slightly better idea as to who it is wouldn't go astray in some cases too, from that liquidity provider point of view. I think on the PB side of things I think we're past, he says possibly wrong again, but I think we're past the day of the flow monsters. At least as you said but certainly on the bank side of things I think that's true. So I think people care a little bit more about who they're actually providing the liquidity to than they did in the past. Now as you said it's more whether that's true of some of the new entrants it's not so …

Who actually go out there and say ‘I'm a non-bank market maker and I provide liquidity on a lowest cost basis.’ Well if they've suddenly got a compliance function they've got to finance it changes their entire business model. Are they going to be willing to make that step? If so, how do we actually make sure they do?

But the prime brokers are already looking who they've got on board. They are cutting quite a number of small plays.

I don't think looking at it from a behaviour point of view though.

Not necessarily no, but they're indicators that would prevent some of these smaller places the two men and a monkey sitting in a garage. It sort of takes them slightly out of play and where they go after that. So it is happening and it's organic because people are aware of their own responsibilities. It might start at the institutional level or at interbank level out to the buy side. We know that the buy side is some of the largest market makers in the market at the moment. So it does filter out and it filters down and the prime brokers are getting smart about their own responsibilities and how they should react.

So I think there's some preventative measures that are going on, everyone wants to be efficient. They're all taking about capital. They're all talking about the reputational issues as well as some of the litigation going on. So as I said, there's some stick but there's also some carrot in terms of making them more efficient. So it does feed down the line probably not as quickly as everyone wants but it does happen. It's happening now from what I'm seeing anyway.

As a platform provider do you actually think that your industry generally will have to step up to the plate more? I know Reuters has an extensive rule book and as Guy said Phil's going to have a big part on the committee but I mean do you actually think industry wide …

Yeah, look, I don't want to sit here spruiking our product but what I would say is that you need to be ingrained in the market. All the market governance committees you need to be part of that. You need to follow that. You need to understand what the best, I suppose the best result for the market participants is as well. So if I'm going to support the market, then I better understand how it works and operates and we better support it in the right way in terms of governance. We're not a governing body and I don't think we ever would or should but in terms of supporting the regulators and the market for its better interests that's what we should be doing. The market should be doing that in general.

Some of the fly by night smaller operators will have a problem because they can't look at the total environment and the operating environment. There are a lot of gaps and holes that they need to plug. Again they might be cheap and that's fine, you can go with that but again what are the consequences of making a mistake and that's all I would say on that, and again it's not about spruiking product or talking to my own book, however people need to consider that and be very careful.

I guess how you actually get the platforms in line, if actually all the platforms are aligned into a similar standard it's going to be quite a big challenge because you know, they're different models but even if you just take the models, firms are different sizes, how do you get these guys, you know, everyone is coded in a different way. This strikes me you'll be having a lot more sleepless nights.

Yeah, no I've got to answer that question in two months' time I think when we actually see what we've got. We haven't just got Reuters and EBS working on this although we do have them, both Phil and Daryl Hooker working on it. But we've got some of the smaller platforms involved as well. As I said we're trying to make sure we've got those different perspectives reflected so it can work for everyone. It's not going to be something that everyone likes. So it's not, by no means some lowest common denominator outcome here but at least have the input from everyone.

We discussed this one we were talking about the - was it a year and a half ago, the Fix. Obviously trading algorithms, banks and institutions were playing a greater role every day whether it's on handling orders and etc. etc. You can put down ethical rules on how they should – you know, what's the gaming the market, what's allowable and what's gaming the market where you're actually working in the worst interests of the client etc. How is that monitored with trading algorithms which can be I would think programmed to game the markets or game orders?

You actually monitor algorithms with algorithms, no I say that in all seriousness. That's the compliance you put in around that. In the end I still think what applies to an algorithm applies to a trader. An algorithm is a fast trader. So it's still in the end at the bottom of it is a trade or an execution method which has got to be consistent, regardless of the speed at which that actually occurs. Just because it's an algo doesn't strike me as being anything particularly different. We've seen around the monitoring and particularly on the PB side, one of the main things they've got to have is some way of monitoring the liquidity provision so that their credit restrictions aren't being breached or if something goes rogue you can kill it quick enough. The monitoring there is already in place at really high speed with kill switches, hopefully which work, in place as well.

It's a very difficult area because if you look at what's happening in the US with the CFTC are trying to bring in this Reg AT and they're after the firm's source code. Well, okay, in the US there'll undoubtedly be a massive court case which will go on for years before they win or lose that demand. But it strikes me that you can give up your source code to someone and go back and get your bloke in wherever he's sitting and say ‘Just put that trap back in again.’

To me I think we need to worrying more about should we be putting in standardised rules around Last Look and round trip times rather than actually how the algo is behaving because an algo can go rogue. As Guy says you should have kill switches in place but accidents will happen. To me I think the algos monitor algos but generally speaking someone has written the code for that algo and as we found out last year with one institution their code basically was not so much abusing Last Look but they weren't exactly straightforward with how they used Last Look.

What is the solution for Last Look and …

I think it's getting to the people who were writing the code and saying ‘By the way this code of conduct adheres to you as well.’

Yeah, I mean Last Look which is something we have said on any number of times going to have something to say about it. Everyone has provided their opinion on Last Look including our friend here over a long period of time. I think it's more just giving … We are pretty confident without completely committing to it, we are going to say there shalt never be Last Look by any means. There is a time and a place for it and there's a way to do it and a way not to do it and that's what I'm pretty confident we're going to say.

Transparency on how they do it.

Yes. There's transparency on how to do it and then, as has come to light in a couple of cases, having said this is what you're going to do, then actually doing it, is also not a bad thing to do. Don't think you needed a code of conduct necessarily to have that one. But anyway which have been partly – I mean people read this stuff and say ‘Isn't this a whole bunch of motherhood statements.’ There are indeed a decent chunk of motherhood statements in there but apparently some people needed to be reminded of these motherhood statements. There's a lot of common sense there which mostly is just common sense. Apparently that wasn't common to everyone's sense.

The reason we need a single code is because financial markets generally or the participants within them, have short memories. So we need somebody to be able to turn around and go, ‘Just in case you're thinking of forgetting in very simple terms there's 76 pages that you should read again’, because these things do come around in cycles.

It's like a knowledge database so to speak.

And it's replacing a lot of different codes that were coming out of different organisations and different …

Yeah I mean, in that sort of strict, you've got the NIPs code in London, the one in New York the ACI code and then the Hong Kong and Singapore both have theirs as well. It's a linear combination of all of those almost in a direct sense plus a bit more.

I think for organisations like ACI they now shift their focus from actually providing the code to providing some monitoring and certification as Les referred to, and as Guy said there in terms of digitalising the learning around it, I think, organisations like ACI should maybe be focusing more on there, and to give ACI their plug they've got this ELAC system which does exactly that. They're one of the several firms that …

I'll let you do that plug. I can't do that plug.

Yeah, that's fine. It just dawned on me they're actually behind this as well. They've got their ELAC. Organisations like that and the FX Committees can turn around and say, ‘You will not be a member of this committee unless you adhere to this code.’ You know, it's a slight change of focus from providing the Code to actually ensuring or helping to ensuring adherence.

I think one thing being one of probably the elder gentlemen on this panel being in the industry for a long time looking at codes as they're developed over many years. Back in the 80s one of my dreams was to actually have control processes in relation to a front office and a back office because I moved from the front office to the back office. Things like codes, the model code, the gold code, or sound practices issued by AIMA facilitate that but I think what we have to careful of, and you told me a story the other day about a particular bank in London who actually had a dealing room planned and they couldn't move into because three floors were taken up by compliance managers and there was no room for the traders. I think we need to avoid that; somehow we need to avoid that. We can't see this model code as being another opportunity for banks to go and employ numerous amounts of compliance officers, and my apologies for any compliance managers out there. It's not a criticism of what the importance of compliance is.

That was insincere by the way.

I think we have to be careful of that. The fact that these codes are there for a purpose and we cannot use them to suffocate business. That's why I think it's important to move to what we said about digitising. I think that's a role for people like Reuters and other industries out there of the digital age. I know Reuters do certain things in relation to personal trading in relation to hedge funds and regulatory processes within hedge funds which is very beneficial. I think that's what we need to do. We need to take these codes on. We need to use them that's what they are there for which is an education and a process of monitoring and assisting senior managers to monitor their trading exposures or the dealing exposures but it's not an excuse to put layers and layers and layers of controls and compliance in which will substantially suffocate business.

To be fair to the industry there are initiatives already out there that allow people to monitor in real time. Stuff that happens over Reuters messaging for instance, you know, they'll pick out words. I was speaking to someone the other day who said, like if something comes up with the word ‘asparagus’ in the middle of a sentence, why is that person using that word ‘asparagus'? Why is that person using that word because it's out of context. So this monitoring technology can pick up on pattern or out of pattern recognition. So I think the industry is actually making a start towards that. With all due disrespect to the compliance officers out there hopefully the three floors in that centre will be replaced by people in the trading area again in a couple of years' time.

Unless anybody else has anything to say we'll open the floor to questions. Then thank the panel for some very real insight before we do. [Applause] There's microphones I think wandering around if anybody has a question, please raise their hand. I've run out. There's one.

Hi John Chase from ANZ not quite starting in ‘73 but ‘83. Look, I think the panel has given a great oversight or insights really into all the big challenges that we're facing. I think someone described it really as this code is helping us down the highway. To me I think we've probably had a major car crash between the way the over the counter market has been operating for 33 years since the float in this country and to the way the legislation as Guy mentioned, and clearly the Code is not the nirvana and legislation obviously will still always rule. So I mean I could ask a backward looking question or I can ask a forward looking question. I suppose if I ask a backward looking question I'm going to get caught in trouble in terms of probably trying to put Guy on the spot on a few things.

So looking forward 10 years and I think the last part of the discussion has really highlighted some of the real challenges of real time compliance and you're certainly seeing in the States some real rigor around that and the requirements and the penalties. They're very severe. We know in exchange traded markets that requirement across different asset classes, commodities, etc has been in futures markets, it's extremely punitive in terms of lack of, you know, in any breach.

Looking at the over the counter market we've had the biggest market in the world, the 5.3 trillion market once we get the BIS update we can change that number, but we've had the biggest market in the world and I think probably a big car crash and we've now got this industry grappling with the remains of the car crash. So what does the industry look like in 10 years? Are we still going to be talking about the grey? Unfortunately we've got people younger than you and I John who are going to be joining in the industry who probably won't like the grey. How do we deal with that? Does that put at risk potentially the over the counter markets and we shift towards exchange traded and we shift towards agency?

That's a really good question and posed a few times before. One thing I've been at pains to stress is the difference between an OTC market and an exchange market. I do think that FX could and should and will stay as an exchange market, sorry as an OTC market. So we've seen much more agency business. Agency business has grown a lot actually particularly around the Fix that's the most obvious, to me at least, part of the business which has shifted to more agency. In some chunk of that that is actually you can see how that agency actually works for that. There are some offerings out there around the Fix which do make it look a little bit more like, at that time of day, look a bit more like an exchange rather than an OTC. But I think in the interests of the client as much as anything the market does need to stay as an OTC market just because of the underlying nature of what it is.

One of the things we have been trying to stress is this is different. It is an OTC market and trying to regulate it like an exchange market is not going to be good. Hence one of the motivations for the work we're doing is saying if someone did go down the route of trying to regulate this like an exchange market, this is not going to go well. You, the market really, really aren't going to like that. I think that's one of the other motivations for us working with the market to get what we get, if we can make that work then that stops the market shifting in a direction which I think would be unfortunate both for the market participants themselves but in particular in the end, the end user of the market is going to find life a lot worse in that state of affairs.

So I hope that we don't end up with FX shifting to an exchange type model because I think that would be an inferior situation to what we've got now. The other thing I always when people say, ‘Oh well what's wrong with that?’ I say, ‘If I look at the US equity market there's a nice exchange based market for you. Doesn't seem to me to be working incredibly well all the time.’ There is the odd problem around in an exchange market as well. So exchange is hardly the solution to all market functioning problems either. And as I said in the FX market I think it takes it to a much worse place.

I was going to say car crash. I can name three car crashes in the non FX market which are probably well known to everyone, which is Barings, Soc Gen and UBS all in relation to futures which is an exchange market. I think car crash is a bit hard call on the FX market. There's some issues there but if you were to go back to those colossal losses for those banks in the past most of them are on exchange traded instruments.

The point I would make is that I think it will stay OTC, just to build on what Guy said, because the end user customers, the people that actually are important to the people in this room, the corporations, the asset managers, what we call the real end user they don't want to trade on the exchange because it's too transparent for their business. They're trying to put through large tickets. We've taught them to maybe break it down into smaller tickets and to maybe use an algo but the fact is on exchange that's very, very easily spotted. A question I'm fond of asking my friends in the US whenever I go over there is, if the US market structure is so great, why is 30 per cent of volume through a dark pool? Because people don't want their business … I don't think it will be driven by anyone in this room as such. It will be driven by the end user, the corporations and the asset managers saying ‘No, no, no I do not want to go down the exchange route. I need delivery so I don't want the clearing piece anyway and I want guaranteed liquidity. I want risk transfer.’

The other point I guess I'll add is I think there's a real danger, one of the biggest dangers for the OTC market John, is what happens if everybody goes agency? I see more and more banks saying, ‘We're going to go agency’ in a very discrete way, but banks in the top 10 by Euromoney's standards are pretty much saying we're agency. I went into one bank in February in London and sat down and they said ‘Here's so and so via the video link. He's our global head of equities. He's going to explain our FX strategies here.’ And I put my pen down and went, ‘Well I think I know what your strategy is’. So that to me is a bigger problem, what happens if everybody goes agency?

I think in 10 years' time its generational. We'll all be, well I'll speak for myself but, you know, be out of the game probably in 10 years' time and it will be generational. The impacts of this car crash will have faded. The scars will probably still be there. It will be folklore and all the rest of it as we've seen in the past. I think the smart players will be looking at efficiencies so further electronification. I think if you're smart you'll be looking at how can you make your business more efficient and cheaper. The funds will be looking at, how can they split trades to 1000 instead of 100.

You've got some of the larger funds saying, ‘I've got problems splitting my orders to 100 sub-accounts and that's a problem now.’ All these things in terms of efficiency and risk weighted assets and all the capital allocation and the like will come into play. The smart players in some of the other asset classes are already looking at it down to the desk. In foreign exchange all these stuff, you'll be looking at your own book thinking how can I make this more efficient so that my margin, my profit at the end of the day is much better?

It's a generational change and people will be considered around the total 360 degree book as opposed to just the trades that they're doing and the risk on the top. They'll be looking at the total efficiency of their business as they go forward. Again, different regime, the market will evolve and I think you'll see far more in the FX market and the OTC world anyway.

More or less humans.

Yeah.

That's the question I always … I won't be here in 10 years but you know …

Well, there's more humans in foreign exchange now than there were 15 years ago.

I think the change will be that probably be less on the machine – sorry, there'll be less as they were doing trades and selling at the moment, but there'd be more advisory. So there will be more bespoke advisory. It'll be a generational shift and there will be a change. We've seen that in other asset classes already so why not FX. It's perfect for over the counter of course, right, but also it's perfect for this commoditisation in a slightly different way going forward. So in 10 years' time we'll see a slightly different package of a product.

I'm slightly more worried about the fixed income market which are now slightly off piste. But I think the fixed income market structure shift is actually more worrying long term than it is in foreign exchange.

We have time for one more question. Anyone?

They want a beer.

Exhausted.

I think that's it. Thank you very much for attending here this evening and thanks again to the Panel. Thank you.

[Applause]