ACI FMA, representing the interests of the professional wholesale financial markets community, responded to the request for feedback with detailed notes and suggestions, including concerns about whether the proposed changes to the wording of Principle 10 may “unintentionally bring other order types into the scope of this text, such as fixing orders, and orders submitted for algorithmic execution”.
In the response, ACI FMA noted that the proposed changes to Principle 10, which states that market participants should handle orders fairly, with transparency, and in a manner consistent with the specific considerations relevant to different order types, should be clear that this includes delegated or managed execution. In the letter, Malrait, along with Kim Winding Larsen, ACI FMA President at that time, added that delegated/managed execution is a “sufficiently complex subject that it warrants separate additional guidance”.
Following the publication of the December 2024 updated version of FX Global Code, Malrait says that these concerns were addressed to some extent in the finalised version.
“The focus was modification of some of the existing Principles and clarifications around the existing text,” he says. “One area that was changed was the wording related to outsourced execution. The goal of this was mainly to highlight that when you outsource execution, such as by using a custodian, or those type of activities where you are not in control of the parameter to the execution, that you have handed the responsibility to somebody else to do the execution for you. What had been missing from the original Code was documentation around how the outsourcing of execution works in practice and how providers can offer you evidence of execution performance through the use of TCA, for example.”
Need for additional clarity
Malrait explains that with the introduction of algo templates and questionnaires following the previous revision of the Code, those measures had already been put in place. “When a market participant uses an algo, they are effectively outsourcing their execution to that algo provider – and the Code has already put in place documentation to reflect that,” he adds. “What is now being recommended in the new version of the Code is that market participants look at the impact of the different changes to the Principles of the Code on their business. There is no black and white answer as this depends on what type of algo participants use when outsourcing those executions. Are they still in control of some of the parameters? Do they receive a TCA with their existing contract or not? The best practice will be for participants to review the changes that have now been made to the Code in relation to how it will impact their business. For algo executions, the changes should have minimal impact.”
ACI FMA were not alone in highlighting the need for additional clarification around the proposed changes to Principle 10. An additional response, which requested that the GFXC withhold its company name, had also noted the scope of the transactions is not clear, adding: “We believe that general bank transactions such as client orders and algorithmic transactions are not included. Please clarify that these transactions are outside the scope.” Furthermore, a response from ANZ also recommended that the GFXC undertake more consultation and review around the wording of its proposed changes to Principle 10. “The proposed changes are open to interpretation and requires more clarity. In the current form it could be interpreted that this paragraph will apply to all transactions that are subject to a written agreement, including for example large transactions,” ANZ said, adding: “The proposed changes are moving away from Principle based guidelines to prescriptive requirements.”
In December, the GFXC published the updated version of the Code after having conducted “an extensive process of review and public consultation (Request for Feedback).” The tri-annual review of the Code FX Global Code started with the GFXC survey for market participants in 2023 to gauge its effectiveness, followed by input in 2024 from the Bank for International Settlements (BIS) Markets Committee and local FX committees (LFXCs) to finalise the priorities for this Code Review.
Longer timelines and increased adoption
Among the targeted changes, the GFXC says it had identified the need to, “enhance transparency obligations around certain types of delegated execution activity”. The amendments to Principle 10 aim to outline the need for heightened transparency around the execution of FX transactions which have been delegated to a service provider who, the GFXC says “also acts as principal to the trade from a counterparty perspective”. Under this type of execution, the GFXC says that the principal initiates the trade on behalf of the client as authorised under a written agreement in advance of trading. “The revisions to Principle 10 call for enhanced transparency obligations which will enable the client to have greater visibility on order handling by the principal, transparency on fees/costs, and enhance the ability to conduct post-trade reviews to assess the quality of execution,” the final wording reads.
ACI FMA, in its feedback to the GFXC, also suggested a longer response period would allow market participants more time to carry out internal discussions and respond to the survey. “For future surveys, a longer response window would be beneficial to the GFXC to obtain feedback from a broader range of market participants, enhancing the quality and inclusiveness of the feedback received,” ACI FMA said.
Following the publication of the revised 2024 version of the Code, an ongoing area of importance is to increase buyside adoption of the Code, Malrait adds, with a working group focusing on how to further increase outreach and awareness among those who trade FX. “The Code was originally created to benefit buyside firms. Using the example of algorithmic trading, buyside participants will want to ensure that best practice is applied and that they have appropriate disclosure with the counterparty they are dealing with for their execution.
If they follow the algorithm template and they have signed up to the Code, this provides them with that additional level of reassurance. Code adoption is voluntary, but buyside participants are increasingly aware of the Code and understand the Code, but many have still to sign up to the Statement of Commitment. More work is being done to encourage that next step in the formal adoption of the Code.”