Bank for International Settlements releases code

A few central bankers, including the RBA's Guy Debelle, are in New York today to release the Global Code of Conduct for the Foreign Exchange Market.

Here's what you need to know:

1) It's voluntary.

No laws have changed, no real regulations have changed. It has about as much legal teeth as the comics code.

" Global Code does not impose legal or regulatory obligations on Market Participants," it says.

2) It's largely for industry dealing

If you're a retail trader, nothing changes and specifically excludes retail traders. In an ideal world this would cut down on front-running and improve market function. In reality, despite some high-profile cases, there isn't a big problem in the FX market. The market scandals involved moving the market a few pips for a very short period of time.

3) It's an interim document

The 30-page code is the first phase of the release. The full code is expected to be finished in 2017.

4) Some heavyweights are involved

Although it's legally toothless. Expect to see it on trading desks

5) Six principles

For an idea of what's in it, there are six principles: Ethics, governance, information sharing, execution, risk management/compliance, confirmation/settlement process.

6) It does apply to retail brokers

Of course. Lots of documents and laws apply to retail brokers but it's still the wild west out there.

7) Orders

It specifically prohibits sharing details of a market participant's order book.

(i) FX Trading Information. Information relating to the past, present, and future trading activity or positions of the Market Participant itself or of its Clients, including related information that is sensitive and is received or produced in the course of such activity. This can take various forms, including but not limited to:

  •  details of a Market Participant's order book;
  •  other Market Participants' Axes;
  •  spread matrices provided by Market Participants; and
  •  orders for benchmark fixes.

8) Market color is still allowed

This is where there is still plenty of grey area. "Client groups, locations, and strategies, should be referred to at a level of generality that does not allow Market Participants to derive the underlying Confidential Information."

The examples are illustrative:

  • Not ok: Bank salesperson to hedge fund: We've just seen large USD/KRW demand from XYZ (where 'XYZ' is a code name for a specific Client)
  • Ok: Bank salesperson to hedge fund: We saw large USD/KRW demand from Real Money names this morning

Read the entire document here (pdf)