Transcript of Question & Answer Session The FX Global Code
Moderator
So, Guy, the first thing we want to just get some background on is what was the driver of the three-year review? Why did it happen? What was the main goal?
Guy Debelle
Beyond the obvious that it's three years on since the Code was put out, so the simple calendar. By the way, it's actually interesting to be speaking to a room full of people at the moment. I could only mingle with people in my own household for the last three months, so this is a bit of a shock to the system. But basically, it's three years since we put out the Code back in 2018, or the whole Code in 2018, and so it's the passage of time and the passage of the market through that time.
So, our intent when we first put it out was always to make sure it stays current and up with the developing trends in the market and so that was going to be one of the main motivations. And partly also just having put it out for the first time three years back, just making sure that we were comfortable with what we'd initially put out on the back of feedback from the market as to how things were working, whether it was being utilised, interpreted the way we had expected it to be, or whether there were some adjustments that we needed to make. So it was basically, make sure that the Code remains current and fit for its purpose of promoting a fair and transparent market.
Moderator
Very good. Was there a sense that some areas were found to be lacking? How did you focus in on the main areas that might need some change? What was the process that was gone through?
Guy Debelle
We asked people. So, we surveyed people in the market through the FXCs and beyond I suppose three years ago now … more than two years ago, and asked people what they thought. Actually, the main feedback was they didn't think much needed to be changed. The encouragement was very much to not change too much at all, but there were a few areas where … Most of the areas where we put through changes are really areas where the market's evolved since we first put it out.
But there were a couple of areas. Mr Mercer, the topic he finished on in the last session. I'm surprised Eva asked David a question about Last Look! – wWho knew he had thoughts on that? But anyway, that area was one where we always get continual feedback, as well as Pre-Hedging, which obviously remains a live issue in the market. So, the couple of areas around execution where we thought some more guidance was warranted and that was the feedback we got, but the other areas I'd say primarily reflected the evolution of the market with one principal exception, which is around disclosure.
And that as much came from our own experience as market participants, as well as others, which is the disclosures we get from our counterparties, or have been getting from our counterparties, are pretty hard to digest. They're pretty legalistic, written by lawyers for lawyers – no offence to lawyers – but that's the way they are. Not so useful, or comparable across counterparties – and Andrew Hauser has talked about this I think at the previous iteration of this conference even – that there was really a need to get more digestible information from liquidity providers on some of the main services that they are offering so that you can assess that information much more easily than you can by trying to wade through a whole bunch of dense disclosure documents.
Moderator
Okay. Very helpful. Just to pick up on two of the topics that you had there. A lot of work has gone into reaching consensus I suppose on the Pre-Hedging guidance paper and on the Last Look paper. Are those now, for lack of a better description, done? Are we letting those bed in now? Is that agreed and the advice is out there for the industry? What are your thoughts on that?
Guy Debelle
Well, the advice is out there for the industry. Is it agreed? No, as previous speakers may have just talked about. I feel, in my mind at least, I think we've provided much more detail, or we clearly provided a lot more information than we did when we originally put out the Code. We've got these more detailed papers providing much greater background around the thinking there. And in both cases, having done that work, we didn't feel the need to change the text of the principle itself, so they should be read alongside the existing principle in the Code and they're really providing more detail.
But I suppose there's a few points in light of the ongoing discussion on at least one of these issues, which are worth making. And one point to bear in mind is that we aren't regulators. I'm not a regulator. I'm a market participant. I happen to work for the central bank, but still a market participant. We aren't regulators and so we can't be out there saying: 'You can't do this'. It's a principles-based code. It is not regulation. But what we can say is what we feel is appropriate practice and what we feel isn't appropriate practice.
I put out some remarks alongside this appearance today, which people can read at their leisure, but let me just pick up a couple of things around Last Look. We make it very clear that Last Look has tended to be used for the price and validity checks only and for no other purpose. And also, that you should apply those price and validity checks without delay. Anything else that prolongs the last look window is contrary to the intent of the Code. And at the end of the paper, the Last Look paper, it outlines some areas of liquidity consumers should be monitoring to assess whether Last Look is being applied appropriately.
So we did think about whether to state what some of those other purposes might be that you shouldn't use last look for. But as I said, we haven't done that for a few reasons. One is that we aren't regulators. It's a principles-based code. And second, if we had a description of some activities that we don't regard as acceptable, then unless we have a completely exhaustive list, which I think is close to impossible, we'd run the risk of providing a safe harbour for anything that wasn't explicitly on that list. And we've seen that happen in the past. And then I know some people think we should have been more prescriptive, but again, it's about being a principles-based code, it's not regulation.
And let me just talk briefly about what the word ‘promptly’, which seems to generate a hell of a lot of semantic and dictionary-based discussion, but anyway … Neill Penney makes this point, my Co-Vice Chair, who I think most of you know, we could have used the word immediately, but at the same time, our view was that could be interpreted as indicating that all liquidity providers need to upgrade their technology to move to a zero-hold time, and that's not an outcome we were after. And then, I suppose, the other point to make is Last Look applies in more markets than the London electronic market. It's a practice right around the world in markets with different latencies and different technologies.
And so what's possible in one market isn't necessarily possible in another. And I suppose the final point I think that's worth making, so, the time period … Trying to specify a time period for hold-time isn't going to work because it's going to differ in different circumstances, in different markets, on different technologies and so I just don't think that's feasible. But what I would say is the disclosure sheets that we put out talk about the length of the Last Look window. And so that allows liquidity consumers to more readily access that information and compare it and contrast, and ask their liquidity providers: ‘Why is it that your Last Look window is longer than someone else's? What's going on here?’
And so I do think there is an onus on the users to ask those questions rather than try and rely on someone else to solve their problem for them. But notwithstanding the fact we just talked about Last Look for the last few minutes, the Code is about more than Last Look. There are 54 other principles in the Code and I think it's important to bear that in mind. The market isn't only about Last Look, nor is the Code.
Moderator
Yeah. That takes us neatly into what else is in the Code. And one of the outputs this time was the various templates for disclosure and the algo due diligence template, the transaction cost analysis data template. These have all been developed to help that level of transparency. What's the expectation, I suppose? How's it envisaged that those templates will be used? Is it something that should be standardised on the sell side? Is it something that the buy-side end users should be asking for? What are your thoughts on how we get those into the marketplace?
Guy Debelle
So, James, what we've done … So, yes, on the standardisation. That's why we've developed this. This is one area where the industry can come together collectively and come up with a standardised cover sheet which is usable. So this group was led by Rohan Churm at the Bank of England. And Rohan's group did actually test drive these disclosure cover sheets with a bunch of market participants on both the sell and the buy side to see if they were broadly fit for purpose before we put them out.
So the idea is that people post these alongside their statement of commitments on the registries and they are … So, it is, as I said, a comparable set of information that liquidity consumers can access to make those comparisons and in a much more digestible way. It hasn't got all the details about the product offering, but it's at least got some of the high-level details that allows you to ask the relevant questions.
And I would hope, having provided the standardised templates to use across those various dimensions you've just mentioned, James, that this is one area where I think it is up to the users to ask their liquidity providers to do this. We have said that these should be posted in the public domain alongside your statements of commitment on those registries. So, I would very much hope that that is taken up. I think it does provide the opportunity for the market to move forward in this space.
Moderator
Very good. In terms of take up, at a headline level, take up of the Code has been extremely strong. I forget the exact number of signups, but I think it's 900, 1,000, if not more, in various different countries, etc., you'll give us the exact figures, I'm sure. Are there certain parts of the market that have signed up more? Are there certain regions that have signed up more? And how's the commitment process going?
Guy Debelle
So, we've got more than 1,100 last update I've got, which I think is pretty good. If you look at it by market footprint, then it's actually a pretty decently large chunk of the market, I'd say probably north of 90 per cent. The breadth across regions, we've got … What are we up to now? 19 different FX markets Certainly, all of the top 15 to 20 markets are all members of the GFXC and so all the market participants in those markets have signed up.
And so that takes you through a decently large chunk of global FX turnover. So, the global coverage is certainly there. Across different types of market participants, I think the coverage is actually pretty good. We've had some greater traction with some of the larger buy side participants who execute in the market directly. So, that's even over the last 12 months, so I think that's good. So, in my mind at least, I think the coverage is actually pretty good.
I think most of the people who have a material impact on the market have signed statements of commitment. It doesn't mean that … We're still, through the various local Foreign Exchange Committee meetings, having conversations with those that we think it would be good if they did, but I'd say, by and large, we've got pretty good take up.
Moderator
And something we talked about, Guy, and you have a bigger hat on this more generally in Australia I know, but in a way, the ever-increasing focus on ESG across all aspects of the markets, perhaps the Code provides on the governance side of things one way of participants – a way, not the only way, of course – to demonstrate good governance as they put their credentials forward. But that's perhaps something to think about as well in terms of the Code and how it could be used in the industry longer term alongside a number of other issues, of course, which you and I have chatted before on.
Guy Debelle
Yeah. In my mind, I don't necessarily like conflating E, S and G. They're all worthy in their own right and sometimes I feel that some people feel that they can trade one off [against another]. I'll be good on G, so I can be bad on E, or vice versa. And so I think they're more worthy aspirations and worthy to be in their own right. And I'm not always comfortable the way they're sometimes meshed together.
So, you should do them because they're all good in their own right. And good governance is good on its own, it stands on its own. E is good. It's a laudable goal on its own. And so, yes, the Code is in large part about promoting good governance in the FX trading market. But in my mind at least, I think I'd rather just have it be looked at through that lens individually rather than try and be conflated with other aspects.
Moderator
Yeah. It has been a unique undertaking for the industry. A question that's come in from the audience just as we've rattled through. How does the Code cope with new technology providers that perhaps can't be monitored like people and can't be held responsible? I guess it comes down to operators of that technology, I suppose.
Guy Debelle
Yeah, unless we've had some major advances in AI while we've been in isolation down here in Australia, I think in the end people still stand behind machines. The other area we provided more guidance on is around algos and in the end, someone's come up with an algo. Yes, there's machine learning, but ultimately, there's someone who's running a business, which is operating an algo.
It's not a being in and of itself. So, there's a human element at some point and really, I think that's the important touchpoint. So, we have a number of signatories for the Code who are almost entirely electronic, but in the end, those companies are owned by people who you have businesses to run.
Moderator
Okay. How well does the Code translate for … You mentioned the footprint in the FX ecosystem predominantly is around the largest market participants, therefore the largest market share. How well is the Code working its way into the FX ecosystem all the way down? And I suppose there was a long conversation just before this one about crypto and the emergence of that, and how crypto is coming into many of these trading venues as well. I suppose that may be a question at some point of does the Code cover crypto as well? You're probably going to say not yet, but interesting thought.
Guy Debelle
Yeah, but I'm not sure how much it changes with the asset. There are some differentiators, but good practice in trading I think is reasonably applicable across all parts, certainly across all parts of the FICC space. And if you want to throw an extra C on the end of FICC for the crypto, then I think that would probably apply there as well.
So, just the fact that it's a different sort of asset, yes, that comes with some bits of new territory, but in terms of not ripping off your customer, I think that applies regardless of the asset that you're actually talking about. Or treating your customer appropriately – let me put it in a more positive light. I think that applies regardless of the asset you're actually talking about.
Moderator
A couple of technical questions have come in, which we may … Tricky to do in the time. Do the principles allow for an LP to add an additional delay within, rather than prior to its price check, for example, or would Pre-Hedging be better defined as anticipating the price of an order to focus on the outcome rather than discussing if an order is anticipated? It's quite tricky, I guess, to get that level of technical discussion into these papers. How did that get dealt with?
Guy Debelle
In terms of the delay, I hope we try to make it clear that really there isn't any other reason for a delay beyond the credit check and the price validation. And a price validation isn't waiting to see whether the price moves in the right direction. That's mostly about ensuring the price isn't stale, particularly in slower markets. So, any other reason for the … We just don't see that there's any other reason for a delay.
Moderator
Yeah
Guy Debelle
So, a deliberate delay before starting the price check and a validity check is not consistent with the Code. So, let me be quite explicit about that, which I think is a direct answer to the question you just posed.
Moderator
Very good. I think we will leave it there, because we need to wrap up. We can probably go into the technical side and it'd take us all day to relive the last three years, Guy. I know the conversations have been endless. Thank you very much for taking the time to speak to everybody. I know that everyone will be looking at the Code and any comments that come around it as we embed it over the next three years. Thank you very much to Guy coming from Australia and thank you for listening. Thanks very much.
Guy Debelle
Thanks, James. Thanks all.