Last year saw the debut of the voluntary Foreign Exchange Global Code (FXGC), a set of principles and guidelines to promote the integrity of the foreign exchange market. One year later in August 2018, the Global Foreign Exchange Committee (GFXC), which developed the code, has published an update. The document is a must-read for any corporate treasury executive with FX responsibility for their organization.

EXCEEDING EXPECTATIONS

The GFXC’s August review of the code’s progress shows that the effort has so far exceeded expectations in terms of the “statements of commitment” (SoC) signed by market participants so far. More than 300 had decided to sign the SoC, well above the 250 who said they would the previous September, and as of mid-September 2018 the list contained 459 names.

Adrian Boehler, co-chair of the GFXC and global co-head of FX local markets and commodity derivatives at BNP Paribas, said that number was heavily skewed toward sell-side firms, about 75 percent, with the rest a mixture of vendors and buyside firms, including eight nonfinancial corporates. “We’ve created a working group focused specifically on buy-side outreach that is targeted at raising the number of SoCs from the institutional buy-side and corporates,” Boehler said. “It is important that the types of organization signing up to the Code reflect the diverse ecosystem of the FX market.”

That outreach so far includes getting promoters of the FXGC on the relevant conference circuits as well as working with industry groups. So far, the GFXC has communicated mostly with non-U.S. associations, perhaps part of the reason none of the SoC signatories so far are U.S. companies. Current corporate signatories include Airbus, Air Liquid Finance, RTL Group SA, Financière Rémy Cointreau S.A and Shell.

However, American firms are on the radar. “You can only expect counterparties to credibly adhere to this ethical behavior if your company is committed to do the same,” said Claas Carsten Kohl, head of treasury reporting and middle-office at Airbus and a member of the Market Participants Group (MPG).

The MPG developed the FXGC along with the FX Working Group established by central banks. Over a two-year span, they took into account more than 10,000 comments from all types of market participants and associations.

In addition, Kohl said, mapping the code’s 55 principals against a corporate’s own FX infrastructure and policies and procedures should enable treasury executives to better understand their bank relationships: What banks are doing with their information and trades; the risk banks are taking on and why they take certain market actions. Bank counterparties adhering to the principals will also be more transparent about the role they are taking on in a transaction, such as whether they are acting as principal or agent, and how they price transactions. “And all market participants, including central banks, have an interest in ensuring the market is fair,” Kohl said.

Airbus notes on its website that more than half of its revenues are denominated in US dollars (USD), prompting it to use hedging strategies to minimize the impact on its earnings before interest and taxes (EBIT) from the USD volatility. It also notes that the GFXC was developed by major central banks and private sector FX participants globally to restore trust and to ensure integrity, fairness, liquidity, transparency and effective functioning of the FX market.

“Airbus is therefore committed to the [FXGC] and has already previously been acting in accordance with its leading principles and will continue to do so,” the company says. “Airbus sees adherence to the code as a way to demonstrate towards its stakeholders’ compliant behaviors in the context of a wide ethics and compliance framework.”

Kohl noted that a challenge the GFXC faces in signing up corporates is their treasury department’s often sparse staff. Large multinationals may have several people focusing specifically on FX, but a still sizable company with subsidiaries in 20 countries may have one treasury executive handling all the treasury functions.

However, Boehler said, for some market participants, perhaps including corporates, not all principles will be relevant, while others may want to consider most to be in their scope.

“As co-vice chair of the GXFC, I encourage all types of market participant to sign up for the good of the industry. Not all adherence is created equal given that different principles will apply to different types of market participant, but all adherence is important,” Boehler said.

Seeking Proportionality

Corporates that are less active in the FX market may determine that fewer principles are applicable and so must be adhered to, although most if not all of the principles are worth at least considering. Kohl said that feedback from nonfinancial companies when the code was being developed suggested they wanted proportionality, so that the smallest and largest market participants could adhere to it.

“Many principles do not apply to corporates since they are purely price takers. However, it is an opportunity to understand much better how banks are determining prices,” Kohl said. “For a corporate not having the capacity to check every price in detail, transacting only with banks who adhere to the code should ensure that it can trust more than in the past that the bank’s prices are fair.”

The increased transparency required by the FXGC could change the way FX market participants operate. Curtis Pfeiffer, chief business officer at trading-technology vendor Pragma Securities, said a key component of the FXGC is trade execution, requiring banks to be more transparent about whether they are acting as a principal or agent and how they demonstrate best execution.

Among the several factors that go into measuring best execution is transaction cost analysis (TCA), which allows institutions to analyze trade data and measure whether they are achieving high-quality execution.

“The FXGC may indirectly influence the adoption of more algorithmic execution,” Pfeiffer said. “One of the biggest contributory factors in the growing use of TCA has been the growth of algorithmic trading. Not only can algorithms minimize market impact, but the granularity of the recorded trading data can be fed back into the decision-making process for future orders.”

Boehler added that he sees significant benefit in reading and understanding all the principles, while leaving each market participant to do its own analysis to determine the principles that are relevant to their own activity. Furthermore, an institution signing up to the FX Global Code sends a strong message to other market participants about where it stands in terms of market behavior.

For corporates, “expecting similar standards from counterparties gives strong assurance to shareholders that the transactions, order flow, information and other aspects of the corporate’s FX activity are being handled in the right way,” Boehler said.