FX Global Code Refreshed

The GFXC publishes the latest version of the Code; it establishes new disclosure requirements, templates and in doing so, it sheds light on the future of Electronic Trading.

Following a public consultation carried out earlier this year an updated version of the FX Global Code (“the Code¹”) has been published in July 2021 by the Global Foreign Exchange Committee (“GFXC”) where 11 of the previously included 55 principles have been amended.

The GFXC has refined the Code across several areas which include: Anonymous Trading, Transaction Cost Analysis (TCA) and Data Availability, Disclosures & Settlement Risk. As part of the update, the GFXC has provided Disclosure Cover Sheets and templates for Algo Due Diligence & TCA, with the aim of assisting algorithm users to remain compliant with the principles of the Code. The update also includes details on additional guidance papers relating to Pre-Hedging & Last Look. In this blog, we have summarised the key updates as follows:

Anonymous Trading

During the review of the Code there was a focus on issues causing major concerns in relation to Anonymous Trading. This has been outlined in the changes made to Principle 9. This version of the Code encourages changes to the following areas:

• Data policies - The GFXC is promoting greaterdisclosure to users and prospective users, focusing on what specific market data is available on FX E-Trading platforms (including Anonymous Trading platforms). This disclosure involves the nature of the data, albeit this type of disclosure will only be possible in some instances.
• Tag management - The Code calls for disclosure of what “tag”² information is made available to market participants. This will also allow for “re-tagging”³ to be carried out.
• Credit policies - TheCode requests disclosure of mechanisms and controls around credit limits, monitoring and limit breaches management. This will allow for better risk management practices to be implemented. This update is to ensure that market participants who trade FX on E-Trading platforms have adequately considered the potential credit losses that could come with this type of trading.
• Identification of Code signatories - The GFXC states that Code signatories should be identified on Anonymous Trading platforms (in some cases). This type of information will be categorised with the “Know your client” data providing greater transparency.

Overall, in this version of the Code, the GFXC is looking to redefine the processes that take place within Anonymous Trading with an emphasis on greater disclosure. In summary, the GFXC hopes to make it clearer to Market Participants where Anonymous Trading is taking place.

TCA and data availability

The GFXC states that further information and insight should be provided on the content of information which EA⁴ providers make accessible to their clients for assessing an execution. The GFXC strongly believes that the standardisation of this type of information will help to minimise costs for the users of EAs and their providers. The GFXC has designed a data template for the purpose of documenting all events that have occurred during small orders; it has been concluded that these events should be documented due to their nature.

The aim of this template is to support algorithm providers with the creation of standardised reports to help ensure that algorithmic trading activities have been carried out and optimal results are delivered. Clients and third-party TCA providers presently use a variety of reporting processes and it is anticipated that this template will support with harmonising the approach across the market.

Disclosures

Disclosures that correspond to FX algorithms vary; this was identified by working group members on several occasions. The challenge is that the nature of these disclosures has created an undisciplined environment for both clients and the providers of FX algorithms. Also, information is scarce as there is no minimum standard for disclosure. Overall, this makes the process of comparison amongst providers difficult for clients. To remediate this issue, the GFXC has designed standardised Disclosure Cover Sheets for FX E-Trading platforms and liquidity suppliers.

Algorithmic Trading

The Code also suggests the use of an FX Algo Due Diligence Template.The template consists of a universal questionnaire and clients are presented with a minimum standard for disclosure that is applicable for all FX algorithm providers. The template allows clients to compare and understand the services they are providing. This type of disclosure information should be available to both existing and prospective clients – for example, by being shared bilaterally or being made publicly available on the provider’s website.

Settlement Risk

Additionally, the Code provides guidance on the management of Settlement Risk. The Code now advocates for a greater use of Payment‐Versus‐Payment (PVP) settlement mechanisms; these mechanisms facilitate the transfer of one currency, only if a transfer of the other currency or currencies also takes place, which will be final and irredeemable. In instances where PVP settlements are not used, Settlement Risk should be properly measured, monitored and controlled. This will lead to an increase in the use of controls and limits which will restrict limits from being superseded.

Pre-Hedging & Last Look

The GFXC has also sought to provide clarity on two major areas, Pre-Hedging and Last Look, due to a demand by market participants. The extra guidance paper for Pre-Hedging is now available. However, the guidance paper for Last Look will be made available later in August 2021. It should be noted that these guidance papers do not form part of the Code, however, they are to be read in conjunction with the Code.

The Pre-Hedging guidance paper provides the definition of Pre-Hedging, when Pre-Hedging can be used and the possible impact on the prices quoted to the liquidity consumer. This guidance is crucial as it provides the clarification that market participants have been in search of and with greater guidance, they can now minimise possible market risks.

In respect of Last Look, the Code allows a liquidity supplier to provide a quote rather than a firm price into the trading system or execution venue. The GFXC’s recommendations will seek to establish a fair and effective Last Look process. Their guidance will update the ex-ante disclosures and it will advocate for information to be readily available to assess how trade requests are dealt with. Market participants are anticipating the value this paper will provide.

Next steps

Following on from the update of the Code the GFXC proposes that market participants update their Statement of Commitment whilst taking into consideration the updates to market activity. The GFXC estimates that it will take up to 12 months for market participants to fully implement the changes into their everyday market activities; they estimate the same for the adoption of the Disclosure coversheet and for the Algo Due Diligence and TCA templates. Market participants now have the choice of publishing their Disclosure Cover Sheet with their Statement of Commitment on selected Public Registers. In summary, this updated version of the Code by the GFXC has sought to assist with the transparency and accessibility of disclosures; it has also, identified clear methods to provide additional information to facilitate comparability amongst the instruments which can be used in Electronic Trading.

Deloitte has extensive experience in supporting firms assess their conformance with the Code and are able to guide financial institutions through the key disclosure and control consideration in advance updating their Statement of Commitment to comply with this latest refresh.

You will find our previous blogs and our insights packs on algorithmic trading risks and controls here. If you would like to discuss more, don’t hesitate to get in touch with any of the authors.

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References

¹The “Code” - a set of global principles of good practice in the foreign exchange market, developed to provide a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market.(GFXC, 2021) FX Global Code (globalfxc.org) (GFXC, 2021)

² "Tag"- unique alphanumeric identifiers assigned to specific users that trade on semi‐anonymous platforms. (GFXC, 2021) GFXC Request for Feedback – April 2021 (Attachment A: Anonymous Trading) (globalfxc.org) (GFXC, 2021).

³ “Retagging” - tags can also be reassigned for various reasons (“retagging”) as part of the tag management process.’ (GFXC, 2021) GFXC Request for Feedback – April 2021 (Attachment A: Anonymous Trading) (globalfxc.org) (GFXC, 2021).

⁴“EA” (Executing Algorithm) - an automated trading program designed to buy or sell a predefined amount according to a set of parameters and instructions with the objective of filling the order. (BIS, 2021)

FX execution algorithms and market functioning (bis.org) (BIS, 2020)

Contributors

Audrey Atsain

Daniel Shearer