Long-awaited FX global code of conduct is released, but does not ban controversial "last look" practice

Lucy White
FX Global Code of Conduct
The code is an effort to clean up the reputation of the FX market, following several scandals. (Source: Getty)

A further attempt to clean up the tarnished reputation of the FX market was launched today, with the release of a global code of conduct establishing common guidelines for good practice.

Developed under the supervision of the Bank of International Settlements by the Foreign Exchange Working Group (FXWG), consisting of 16 major central banks, the code contains 55 principles covering ethics, transparency, governance and information-sharing.

A private sector market participants group, chaired by David Puth of CLS Bank International, was also heavily consulted during the development process.

“All of us recognise the need to restore the public’s faith in the foreign exchange market. We share the view that the global code plays an important role in assisting that process and also in helping improve market functioning,” said the Reserve Bank of Australia deputy governor Guy Debelle, who headed the FXWG.

The long-awaited move follows the FX scandal of 2013, when it was revealed that currency dealers had been front-running client orders and rigging the foreign exchange benchmark rates.

Read more: HSBC had investigated foreign exchange trade and found no breach of conduct

It also comes after players were put under increasing pressure over the “last look” practice, which allows market makers to back out of a trade having potentially unfairly learned a counterparty’s intentions.

“People on the buy-side, asset managers or hedge funds for example, weren’t aware that they were being priced in a way that was in some respects unfair,” said Roger Rutherford, chief operating officer of spot FX electronic trading platform ParFX.

“I think the transparency introduced by the code around last look, and understanding what last look means, will be significant.”

The code does not ban the practice, but instead dictates that any market providers employing last look “should be transparent regarding its use”.

“We would have liked the code to go further, specifically around last look and pre-trade hedging,” said David Mercer, chief executive of LMAX Exchange. “But we're led to believe that the working group will continue to consult with the market and I hope that a later draft will get us further. I think that the code is a pragmatic, good start.”

Other key areas of the code look to regulating electronic and algorithmic trading services, a move which has been welcomed by service providers who should now provide “adequate disclosure” regarding how they operate.

Read more: Sterling smashed in flash crash: Why did it happen?

“Greater transparency in the market will reduce some of the friction,” says Curtis Pfeiffer of Pragma, an algorithmic trading platform. “The principles of the code will serve as a foundation to improve the working relationships with the buy-side and sell-side.”

The FX code of conduct is voluntary and non-enforceable. A Global Foreign Exchange Committee, formed of public and private sector representatives, will promote and maintain the principles.

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