Profit & Loss talks to Marshall Bailey, president of ACI - The Financial Markets Association, about the implementation of the Global Code of Conduct within the FX industry.
Profit & Loss: One of the biggest concerns that is always brought up regarding the Global Code of Conduct is whether it will have teeth. What do you make of this concern?
Marshall Bailey: I understand that view, but I don’t believe that it’s genuinely a concern and there are a number of reasons why.
Firstly, although there are some who might claim that the FX market has too much regulation, and that the Code represents pseudo-regulation, I think that this is very much an old school mentality. In the new world, all serious traders – whether on the buy-side or sell-side, large or small firms – know that the industry has had an opportunity to address these conduct issues itself. The best outcome is for the industry to work together to find a solution.
As for teeth, I believe that the Code is a chance for the market to not only demonstrate its accountability, but also to show that it is committed to the principles and best practice the Code has outlined. In working with the Market Participants Group (MPG), I have seen firsthand their dedication to getting this right. They all want to ensure that there is clear and comprehensive guidance on what is and what isn’t acceptable behaviour that is applicable and understood by the whole market.
While adherence will ultimately be down to individuals and individual institutions, we have observed overwhelming support for the Code from the wider FX industry. Once the Code is fully implemented, those choosing to adhere to it will require training and an attestation mechanism to prove their adherence.
Market participants will be striving to find meaningful ways of teaching, testing, certifying and demonstrating this adherence in a way that others will understand. Eventually, this will just become standard practice in the new world of FX.
P&L: There has been a lot of talk about “market place consequences” for not adhering to the Code. What do you take this to mean?
MB: There have been a number of things suggested when talking about creating real market consequences. One is that firms will agree to only transact with counterparties that have self-declared their adherence. It hasn’t yet been agreed exactly how this adherence will be measured, but work is underway, and several promising ideas have been proposed.
There have also been suggestions that there are some counterparties who are vowing that they will provide more business to people who adhere to the Code, creating an incentive for the market.
It’s likely that there will be an element of the industry wanting to benchmark and demonstrate its success. Investment managers that have, for example, completed their CFA are very proud of that and they put it on their cards as a trademark of what they’ve achieved, meanwhile market participants like to see financial services firms ranked and put in league tables according to their performance.
In a similar way, I think that firms and individuals within these firms are going to want to publicly trademark that they adhere to the Code.
P&L: Do you think that having a mechanism for proving adherence to the Code just pushes the responsibility for this adherence from the financial institutions and to the individuals themselves?
MB: I’m very much of the belief that this is what should happen. It is imperative that individuals themselves, including those that are not supervising others in the company, should behave according to the Code for their own sake, and it is hoped that this will in turn positively influence others around them by doing so.
On the other hand, if you run a sizeable team at a large institution then you should be held accountable for the behaviour inside that institution. We’ve seen in some cases that a few individual employees have claimed they weren’t aware of certain obligations, or that their peers were aware of their actions, and we have ensured that understanding accountability at all levels has been clearly addressed in the Code.
The accountability issue is undoubtedly notable and the Senior Management Regime (SMR) in the UK is entirely designed to make sure that people are accountable. Whilst the UK SMR is not international, accountability should be.
P&L: But isn’t there a danger that these adherence mechanisms become like an insurance policy for the banks? So that, provided they make staff gain some sort of attestation and certification of agreed adherence to the Code, they are insulated from regulatory fines if there is misconduct in the future?
MB: I disagree with the term “insurance policy”. However, one of the ways in which the Code will be measured, in terms of how successfully it is being adhered to, is to provide proof of understanding and demonstration that adequate training has been provided.
It’s not just a case of market participants simply saying they will follow the Code, there’s no one monitoring their activities and there are no surveillance mechanisms in place around it. So it isn’t just about training and testing, there’s a lot more required.
P&L: Would this Code of conduct have prevented the recent FX scandals?
MB: I think that this question comes back to the idea of accountability. Codes of conduct did exist prior to these incidents, although some were better and more widely adopted than others, and some financial institutions were far more committed to following them than others.
It seems that a small handful of people within certain financial institutions failed to take notice of these Codes and what has happened subsequently is that the industry has woken up to this problem and is now trying to fix it.
The Code is one way of providing clarity around some of the former grey areas about what should or shouldn’t occur in the industry, but it’s still up to the firms and the market participants if they’re going to fully commit to its principles.
P&L: Have there been any pockets of resistance to the Code that you’re aware of?
MB: There are still locations in the world where the Code is not at the centre of practitioners’ thinking for a variety of reasons. But overall, the individuals who participated in the creation of the Code, and the vast majority of market participants in general, are taking it very seriously and we expect significant uptake of the Code once it is fully implemented.
P&L: ACI’s eLearning, Attestation and Certification (ELAC) portal is something that you’ve been working on for some time now, how does this fit in with the implementation of the Code?
MB: Well the ELAC portal is a project that started before the BIS work began but it had exactly this outcome in mind.
All organisations and individuals within them are going to want to have different adherence mechanisms available to them. Large players that have had a conduct problems in multiple jurisdictions are more likely to have spent a lot of time and money building their own adherence mechanisms, possibly with the support of some legal council and consultants.
But it’s my belief that all members of the market should have the opportunity to benefit from those types of high-end adherence mechanisms, and this is what we aim to provide with the training, certification and attestation that we have inside ELAC. So ELAC is a way of facilitating a platform that is available globally to the entire industry that is as professional as the one that the larger players have built for themselves.
The other thing that is important to note is that we’re not seeking a monopoly or regulatory intervention here. We’re just trying to facilitate a voluntary adherence attestation mechanism. We recognise that not everyone will want to outsource this, but we believe that many will.