ECB to lead revamp of global FX codes of conduct
The European Central Bank has been given the lead role in work to strengthen codes of conduct for currency markets, expected to be one of the main areas highlighted in a report from global regulators due within weeks.
Banking industry sources said work on new standards were top of the to-do list after a meeting in Sydney last month which brought together eight central bank committees charged with keeping tabs on the world’s biggest financial market.
The meeting followed a fraught 12 months for the global currency market. More than 40 dealers have now been fired or suspended following claims that senior bankers used client order information improperly to manipulate prices.
Many in the industry say pressure is likely to grow for more radical action to head off any wrongdoing. But sources said anything along these lines would probably not come until after the first results from various investigations underway around the globe.
The Financial Stability Board, the global regulatory body, is due to publish its initial findings on currency benchmarks within weeks. The group that met in Sydney – the Global Foreign Exchange Committees – is separate to the FSB, but the participants are very similar.
Giving the ECB the coordinating role in looking at codes of conduct puts control of the process outside of the world’s biggest currency trading centers in London and New York.
The ECB, along with the Reserve Bank of Australia and the Bank of Canada are all signed up to the Model Code run by dealer association, the ACI. The New York Federal Reserve and Bank of England both have their own set of rules, but an agreement on the new principles could tie all closer together.
The minutes of the Sydney meeting showed the banks agreed to establish “high level principles” but that all of this might need to be revisited later.
“It is interesting that the ECB has largely been given control of this process,” said one banking source. “Effectively the end game is some kind of rewriting or formal adoption of a lot of those pieces of the ACI model code by all of those centers.”
The ECB declined to comment, referring Reuters to the minutes of the Sydney meeting which agreed to lay out “high level principles”.
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The FSB said conclusions and recommendations would be transmitted to the G20 leaders summit in Brisbane, Australia, in November. But officials say the group’s initial report may be outlined as early as this month.
In addition to the work on codes of conduct, the sources said the FSB report was unlikely at this stage to recommend aggressive steps that would change the face of the foreign exchange market.
Banks and other market players are concerned that the investigations may eventually put an end to the era of light-touch regulation of forex and may force trading onto more formally monitored trading venues, as is happening with much of FX-linked derivatives trading.
But for now, the investigations into the allegations are expected to stretch well into next year if not beyond and some regulators say it is still not clear if there was wrongdoing at all.
“The industry is crafting the best response it can without knowing the outcome of the investigation,” said another source.
“If, as many people expect, we start to see prosecutions and fines as we did under Libor then it will be a different ball game. More aggressive solutions will have to be put on the table.”
Banks, funds and other market players are already shifting towards new ways of establishing industry benchmarks, ranging from more use of machine-driven algorithms or to systems that make order-placing anonymous.
The sources said the FSB report would support that work with some general recommendations encouraging moves to fix daily benchmarks over longer time-periods when trading is most liquid – making it harder to reliably manipulate the direction of trade.
There is also discussion of ways to change how big financial institutions lodge the fixing orders that lie at the heart of the investigations.
“The truth is that the practical problems with the fixings that are behind this are already going away,” said one of the sources. “There are some issues which take time to wash through the system but the industry has already changed. I don’t think these issues will exist in three years time.”
(Writing by Patrick Graham)
Sources: reuters
