Banks, policymakers and investors have drawn up a new set of guidelines for behaviour in the vast global foreign exchange markets, seeking to rebuild trust after a series of scandals, just a day after France’s BNP Paribas became the latest bank to receive a fine for years of “nearly unfettered misconduct” in currencies.
The 78-page code, co-ordinated and released by the Bank for International Settlements, follows an earlier version revealed a year ago. It is not designed to replace local laws and regulations, but the 55 principles have been compiled through consultation with all the major stakeholders. Central banks have made it clear they will freeze commercial banks out of their counterparty lists unless they demonstrate fairness, discretion and high ethical standards.
“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 Reserve Bank of Australia deputy governor Guy Debelle, who chaired the working group behind the project.
Mr Debelle added that market participants had already started to clean up their behaviour, particularly since the release of the first version of the code. “They have already evolved,” he said. “That’s something I would not have anticipated.”
Dealer banks — the key target here — are expected to take six to 12 months to get their systems in line and aim for full compliance. They and other market intermediaries have signalled strong support for the initiative, which is also aimed at investors and hedge funds.
Even central banks are expected to adhere to the principles in the course of their day-to-day currency transactions, although they retain the scope deliberately to try and move exchange rates as part of their monetary policy operations.
“The code sharpens the mind,” said David Puth, the former banker also involved in drawing up the code. “Market participants should strive for the highest ethical standards. If you look back to some of the things that have happened in the past, there are certainly instances that could be deemed unethical behaviour,” added Mr Puth, now the chief executive of currencies industry utility CLS.
BNP Paribas’ $350m fine, covering conduct between 2007 and 2013, comes after a clutch of the biggest banks in the business — including UBS, Citi, Barclays and JPMorgan — paid a total of $10bn in 2014 and 2015, largely to settle allegations that their traders shared too much supposedly confidential information about their clients’ activities.
Spooked by those fines, banks became extremely cautious about communicating with each other, and with central banks. In part, both today’s code and the earlier version are designed to address what types of information banks can share with each other, and with central banks, illustrating how banter and market colour can go too far.
“Back in the day, there were clear issues around inappropriate information sharing, and the reaction was to say ‘OK, no sharing at all’. That had a detrimental effect on market functioning,” said Mr Debelle. He added that the new principles were not expected to make currencies trading more expensive, for banks or for their clients.
The updated code also covers a practice known as “last look”, which gives banks the scope to withdraw prices at sub-second notice. Barclays was fined $150m in 2015 for misuse of that facility.
“We will continue to see questions around why it exists at all, but there’s a lot of reasons why ‘last look’ is necessary, the most often cited being the need for credit checking,” said Mr Puth. “The point is not to leave it open to abuse.” The organisations behind the code are still consulting with banks over the finer points of “last look”. Mr Debelle said these elements were “hotly discussed”.
Wednesday’s order against BNP Paribas is the New York regulator’s first FX-related action and could lead to more. That suggests that despite the new code and new attitudes to current and future conduct, historic cases of poor behaviour could still haunt the market for some time yet.