Galina Dimitrova
Galina Dimitrova

FX Markets: the balancing act between direct regulation, new technology and principles-based supervision

With more than 2,000 asset managers and corporates already using the SWIFT network to confirm their FX trades with and through banks as well as FX platforms and non-bank liquidity providers, SWIFT users can adopt and implement the principles of the FX Global Code in their day-to-day business without incurring significant cost. An asset manager’s use of SWIFT, for example, could itself facilitate alignment with up to 14 of the Code’s 55 principles. Nevertheless, many buyside firms have still not signed up to the Code. eForex spoke to Galina Dimitrova, Director for Investment and Capital Markets at The Investment Association, to discover buyside attitudes to the Code.

First Published: e-Forex Magazine 87 / SIBOS 2019 / July 2019

“We’ve endorsed the FX Global Code from its inception,” says Galina Dimitrova. “We have worked together with our members to promote it, and to educate first and foremost our member institutions but also to spread that awareness and education all the way to the end-client.” The Investment Association is “very supportive” of the FX Global Code. Dimitrova continues: “We did think that previously, the global FX market did suffer from not having a single overarching set of principle-based rules to harmonise standards across all those multiple jurisdictions. The new Code very much addresses that. It clearly lays out in some detail what is expected of market participants including counterparties.”

This is, to state the obvious, a ringing endorsement, and the Investment Association’s commitment continues. “We continue to engage with the Code’s ongoing maintenance and development,” says Dimitrova. The Investment Association is also part of the Global Foreign Exchange Committee’s Buyside Outreach Working Group, which aims to raise awareness of the Code and its value to the buyside. But, as Dimitrova concedes, the Working Group owes its existence to a lower adoption of the Code on the buyside than on the sell side. Why is this, and what is being done to encourage buyside adoption of the Code? Do buyside firms not regard themselves as responsible - as sharing in the responsibility - for the efficient and fair working of the FX market?

Principles for the long term

If that is a view held at all on the buyside, it is very much a minority view. “Our members very clearly understand their own obligations to ensure the continued well-functioning of FX and other markets. They have put in a lot of work,” says Dimitrova. And yet adoption still lags. There are several explanations for this. “Initially, there was a question around awareness of the Code,” Dimitrova continues. The Investment Association represents over 250 firms, and the outreach process to all of them - which included a series of information events - took some time.
There was another issue. In the early stages after the Code’s inception, there was a “lack of clarity” around the sign-up process itself - to which the Investment Association published its own guide. “There remains some difficulty in understanding what principles of the Code apply to the buyside as distinct from the sell side. The Code is for all market participants, but of course we all look for the part that applies to us specifically. That remains unresolved at some level,” says Dimitrova. The Code itself has scope to evolve, and the Investment Association has published papers on, for example, last-look.

Not surprisingly given the scale and the complexity of the global FX market, the Code is principles-based.
Not surprisingly given the scale and the complexity of the global FX market, the Code is principles-based.

Buyside engagement goes beyond the sign-up process itself, of course. The Code embodies a set of principles that buyside and other signatories must implement and observe over time. There is an obligation on firms to self-monitor their own adherence to the Code. “Our members take this very seriously. Implementation is a process, and it requires the resources and capability to demonstrate ongoing adherence. We are taking all of the right steps to address the low degree of buyside sign-up, which is not for lack of commitment to the Code. There are genuine issues that we are trying to tackle,” says Dimitrova.

Signed up or not, the Code does hold the buyside’s attention. “It has been top of the agenda for a number of years now,” says Dimitrova. “The Global FX Code has very much preoccupied our members. Other priorities come and go, but our members have remained interested, and we do see them very engaged with it.” Slow - or perhaps more accurate, gradual - adoption may be indicative not of lack of interest, but of how seriously the buyside is taking the Code.

Principles-based harmony

The Code is voluntary. Would a more formal, more direct approach to regulation be appropriate? Such an approach would after all, obviate the need for sign-up. “We are very supportive of a globally harmonised approach to FX regulation, to avoid putting up any barriers to trading between the various jurisdictions.

New regulation can have unintended consequences, and is only appropriate where there is a clear market failure to address issues. The code is voluntary, but it is being implemented, and hopefully no other formal direct regulation would be needed,” says Dimitrova. “So far, so good.”

Further to this, and not surprisingly given the scale and the complexity of the global FX market, a notable feature of the Code is that it is principles-based. Dimitrova says: “The Code is sufficiently high-level to be able to be applied across the board. It has to be principles-based, and thus high-level, so that it can be applied through many markets.” The Code has to be sufficiently “flexible,” says Dimitrova, to accommodate the scale and the diversity of the FX market. “I don’t see any dangers in this; we’ve signed up to the benefits.”

Generally, the Investment Association supports industry-led solutions to market problems. Dimitrova says: “The Code is demanding, and it has shown itself capable of bringing a newly harmonised set of rules to the FX market that hopefully offset the need for any other regulation in this space. We are engaging with our members actively, not just on the Code but overall on FX issues, and on an ongoing basis we consult with them and discuss whether there is anything that needs to be done to better address this market. We are supportive, and our industry is supportive, of the Code.”