Transcript of Question & Answer Session Opening Remarks at the Global FX Code of Conduct Launch

The FX Global Code of Conduct was launched just over two weeks ago in London. There it is, if I can get it in front of the camera. It's available on the Global Foreign Exchange Committee's website, its recently launched website, so www.globalfxc.org, or probably at least as easily you can find it on the Hong Kong Treasury Markets Association as of a couple of weeks ago. So what I'd like to do today is reiterate the motivation for the work that we did, highlight the main features of the Code as well as associated adherence mechanisms, summarise how we got to where we got to in developing the Code, and then talk about some of the things which are happening now and the way forward.

So firstly let me start with why has this work been necessary, and I suspect most of you are probably well aware of the motivation which is that the foreign exchange industry has been suffering from a lack of trust, and that lack of trust is evident both between the participants in the market and at least as importantly between the public and the market. So the market needed to move towards, and still does, needs to move towards a more favourable and desirable location and allow the participants in the market to have much greater confidence that it's functioning appropriately. So to that end, the Code sets out global principles of good practice in the FX market to provide a common set of guidance to the market as to what constitutes good practice.

So I think this will help to restore confidence and promote the effective functioning of the wholesale FX market. Because a well-functioning FX market is very much in the interests of all market participants. This clearly includes us as central banks both in our own role as market participants, but also because the exchange rate is an important channel of monetary policy transmission. So in a globalised world, the FX market is one of the most vital parts of the financial plumbing.

So one of the guiding principles underpinning our work is that the Code should promote a robust, fair, liquid, open and transparent market. A diverse set of buyers and sellers supported by resilient infrastructure should be able to confidently and effectively transact at competitive prices that reflect available market information and in a manner that conforms to acceptable standards of behaviour. So as I just said, we're not talking about just the sellers, we're talking about the sellers and the buyers and also we're talking about the infrastructure. So all aspects of the market are important here.

The work to develop the Code began two years ago in May 2015 when the BIS Governors commissioned a working group of the Markets Committee of the BIS which I chaired up until just recently, to do two things. First, come up with this single Global Code of Conduct for the wholesale FX market and secondly, to come up with mechanisms to promote greater adherence to the Code.

I'd like to emphasise that this work was very much a public sector/private sector partnership. We at the central banks were ably and vigorously supported by a group of market participants chaired by David Puth, CEO of CLS, who I'm sure most of you know, and as John mentioned earlier, Justin Chan was on the group from the Hong Kong part of the world. David's group contained people from all over the world on the buy side including corporates and asset managers and the sell side along with trading platforms, ECNs and non-bank participants drawing from the various foreign exchange committees involved in the process and beyond.

So all parts of the market were involved in drafting of the Code to make sure all perspectives were heard and appropriately reflected. There are two important points worth highlighting. First of all it's a single Code for the whole industry, and secondly it's a global Code. On the first point, the Code supplants the existing codes that have been present in the FX market and so that includes, in Hong Kong, the code being used by the Hong Kong Treasury Markets Association. In my neck of the woods, in Australia, we've followed up until just recently the ACI code, so we are now using the Global Code, although as a number of you may already know, ACI has adopted the Global Code as its Code of Conduct for the FX market just recently as well.

Secondly the Code covers all of the wholesale FX industry. This is not a Code for just the sell side, it is there for the sell side, the buy side, non-bank participants and the platforms. So it reaches around the globe and across the whole industry. The way it is relevant to you will depend on the nature of your engagement with the FX market. So what this means in practice is that the steps different market participants take to align their activities with the principles of the Code will differ reflecting the size, complexity, type and extent of their engagement with the FX market.

As I said, our group contained representatives from the central bank and the private sector from all the 16 largest FX centres including both developed and emerging markets. So basically the top 16 FX centres right around the world were all directly involved in this process. The first phase of the Code was released in May last year and it covered areas such as ethics, information sharing, aspects of execution and confirmation and settlement. The full Code, which we put out a couple of weeks back, obviously has all of that, plus further aspects of execution including e-trading and platforms, prime brokerage as well as sections on governance and risk management and compliance.

The complete Code comprises 55 principles spanning those issues. The principles are written in plain language and should be easily read and understood by market participants. As I said, there are only 55 of them, they're in pretty plain English, so your average FX trader should be able to read and understand them without too much trouble. The principles are supplemented by a suite of examples to illustrate their practical application and as I said, there are only 55 principles, but the examples I think are also pretty relevant in illustrating what exactly we mean by the principles. Most of the time the principles, I think, are pretty plain English, plain Australian, but the examples actually go some way to making it clear what exactly we're on about.

Market participants had a number of opportunities to comment on the Code as it was put together in addition to the direct input from the Market Participants Group. Prior to its release, drafts of the full text of the Code were distributed to market participants for their review through the various foreign exchange committees, but also through other industry associations to make sure we got perspectives appropriately reflected in the Code. So through this process over 10,000 comments were received.

The Code reflects our collective judgement as to what constitutes good market practice in the market practice in the market taking account of the feedback we received. I think it is a good outcome of the process that we're able to distil the points of contention down to a small number of issues. Outside of these, the feedback reflected a widely held consensus across the market as to what constituted good practice. Market participants have recognised the Code's aim of helping move the FX market to a better place. One of our central aims in drafting the Code was for it to be principles based rather than rules based, and there are a number of reasons why this is so, but for me an important reason is that the more prescriptive the Code is, the easier it is to get around. To put it in trading vernacular, rules are much easier to arbitrage than principles.

The more prescriptive and the more precise the Code, the less people will think about what they are doing. If it's principles based and less prescriptive then market participants will have to think about whether their actions are consistent with the principles of the Code. So we have not written a procedures manual, rather we have articulated principles that need to be taken into account. Individual firms may then take these principles and reflect them in their own procedures manuals. Our aim in setting out these principles is to provide market participants with the framework in which to think about how they, for example, handle things like stop-loss orders and the emphasis here is very much on the word ‘think’. The Global Code will not provide the answers to all your questions but it should help you at least ask the right questions.

Alongside drafting the Code we devoted considerable time and effort to think about how to ensure widespread adoption of the Code by market participants. Clearly that has been an issue with the various codes which were there before in a number of markets. It is evident that they were ignored on occasion in the past wilfully or otherwise. So we have worked with the industry to produce a principles based code rather than a single set of prescriptive regulatory standards. So let me emphasise, the Code is not regulation, it will not impose legal or regulatory obligations on market participants, nor will it supplant existing regulatory standards or expectations.

Given that, we have developed a blueprint for adherence that is being published alongside the Code, and you can find it on the same website I was talking about earlier, which sets out the key elements we think will be required for the Code to be successful and the steps that have been taken and will be taken to ensure this is the case.

One critical dimension is market-based adherence mechanisms. An important element of discipline needs to come from the market itself. The adherence to a voluntary code will only come about if firms judge it to be in their interests and take the practical steps to ensure the Code is embedded in their practices. Such practical steps would include training your staff and putting in appropriate policies and procedures which are aligned with the Code.

In addition, we have provided the draft Statement of Commitment for firms to publicly demonstrate their adherence to the Code. It's in annex 3 of the Code, it's only three sentences. It's fairly clear what exactly you are signing up to when you are signing that Statement of Commitment. One reason for a public demonstration is that firms are more likely to adhere to the Code if they believe their peers are doing so too. That is, an important source of pressure to adhere should come from other market participants. To provide visibility around this, there are a number of market based initiatives to provide public registries where market participants can demonstrate their use of the Statement of Commitment and we should have some information out as to where and in what form those registries will take some time in the next month or so, hopefully by the end of this month.

More broadly, market participants have a vital interest and a role to play in promoting and upholding good practices in the market as a whole. This can be partly achieved through leading by example but can also be supported by having similar expectations of counterparties and other market participants in helping to raise awareness of the Code in market interactions. In that regard, the FX Working Group reached out to more than 120 industry associations right around the world as well as key market infrastructure providers to make sure that they are getting the Code out to their members. Ultimately the success of the Code in promoting integrity and restoring confidence in the wholesale FX market lies in the hands of its participants.

Another aspect of market based adherence comes through the foreign exchange committees. In due course adherence to the Code is likely to become a requirement of foreign exchange membership. This is certainly true in the case of Hong Kong and it's certainly true in the case of Australia. To be a member of the local foreign exchange committee in both jurisdictions, you will have to sign a Statement of Commitment to the Code. That will ensure that the Code is embedded at the core of the FX market because if you think about the membership of the foreign exchange committees around the world, they pretty much cover the bulk of the core of the foreign exchange market. But it is also important that it extends beyond that, and that there is at the very least an awareness of it across all market participants.

Another dimension of adherence is that the BIS central banks have signalled their commitment by announcing that they themselves will follow the Code and that they expect that their counterparties will do so too. So again, in my own case, in the case of the Reserve Bank of Australia, we will have it as a requirement to be a trading counterparty with us that you will sign the Statement of Commitment.

Given that we have only just provided the full text of the Code to the market last month, there will be a period of time for market participants to adjust their practices where necessary to be in line with the principles in the Code. I would not expect this should take too much time to do this. It might potentially be as short as six months but no more than 12 months for the vast majority of market participants. That's because I think what we've got in the Code is very much reflective as to where the market has moved over the last few years that it itself has tried to adjust its practices to be more in line with good practice in the market.

How much effort it might require will in part depend on the nature and extent of engagement with the FX market. In drafting the Code we have always kept the principle of proportionality in front of mind. If your engagement with the FX market is sporadic or only in one particular area then only that part of the Code will apply to you. We're not expecting that all 55 principles are going to be relevant for every single market participant.

Finally, it is vital that the Code remains up to date and evolves as the market evolves. So going forward the Code will be collectively owned, maintained and updated by the Global Foreign Exchange Committee which met for the first time in London in May. So that includes all the foreign exchange committees from the top 15, 16 jurisdictions around the world. So it does include, for instance, the Chinese Foreign Exchange Committee, the Korean Foreign Exchange Committee and obviously Hong Kong and Singapore in this part of the world and Australia. So this will continue the public/private sector partnership which has supported the development of the Code. The GFXC will regularly assess whether new information or market developments warrant updates or additions being made to the Code.

As the first example of this, given the diversity of views on the use of Last Look in the market the GFXC is currently requesting feedback on trading in the Last Look window. So if you are interested or have a view on Last Look then if you go to the GFXC website you'll find a way that you can provide that view to the GFXC for it to take into account in assessing the text we've got on Last Look in the Code. That doesn't mean that the text which we've got there at the moment isn't final, it's just, as I said, given the diversity of views we've received on this issue through the drafting process we thought it would be useful to make sure that we have got the full set of views out there in the market. I'm pretty sure we got close to it. On a less frequent basis the GFXC will oversee a more comprehensive review of the Code, but that's going to be something like every three years or so.

In conclusion, the Global Code is the culmination of two years of work by a group of people from both the private and public sectors. The work reflected a very constructive and cooperative effort between the central banks and market participants. We all undertook this work in addition to our regular responsibilities at all hours of the day and night. This contribution in time and effort reflected the fact that all of us recognise the need to restore the public's faith in the FX market. We share the view that the Global Code plays an important role in assisting that process and also in helping improve market functioning and confidence in the market. So let me finish there and I hope you have a good discussion. All of the information that I'm talking about, the Code itself, the adherence mechanisms and the Last Look consultation is all available on the Global FXC website, which I would ask that you have a look at. So let me finish there John, and back to you.