Among the key issues in the FX market has been settlement risk, given the increasing number of trades being settled without PvP protection, says RBA deputy governor Guy Debelle.
The GFXC (Global Foreign Exchange Committee) is planning to complete its latest review of the FX Global Code by mid-2021, after the Covid-19 pandemic delayed its work earlier this year.
When the Code was launched in 2017, the GFXC committed to undertaking a review of the Code every three years to ensure that its guidance remains appropriate and is contributing to an effectively functioning market.
According to RBA (Reserve Bank of Australia) deputy governor Guy Debelle, while “wide-ranging feedback” from market participants last year confirmed that the Code remains fit for purpose, there were a few key areas where closer review was warranted.
One area of focus for the GFXC is getting greater adherence and commitment to the Code from the buy-side. While more than half of the world’s top 30 asset managers have signed Statements of Commitment to the Code, there is scope for further progress, Debelle said, speaking remotely at the FX Week Australia Webinar on Thursday (22 October).
The GFXC considered developing a simpler version of the Code for the buy-side, but decided that a single Code “remains the best was of ensuring there is a common market standard that constitutes good practice”.
Additional guidance will however be developed to assist firms in identifying the principles contained in the Code that are the most appropriate for them given the nature of their practices.
A priority for the GFXC is to develop further guidance around certain trading practices, in particular last look and pre-hedging, to provide greater clarity about how these practices are used and what the relevant considerations are for market participants.
THe GXFC is also looking to enhance transparency around these trading practices through disclosures, which Debelle says are currently challenging to comprehend and evaluate given the different sets of disclosures that can be produced by a single entity and a lack of consistency in how they are provided.
“Disclosure documents are also reviewed and updated at different times by different counterparties, and there is no central repository of multiple firms’ disclosures,” Debelle said. “The GFXC is aiming to develop solutions that will address issues in comparing information across different disclosure documents and facilitate access to disclosure information.”
Another key area where comparability is needed is algorithmic execution, which now accounts for between 10 and 20 percent of FX spot trading. The GFXC is seeking to determine how well market participants understand the risks of algo execution and whether the often high-level disclosures are adequate.
The GFXC also has an ongoing workstream looking at the increased usage of anonymous trading, the roles played by venue providers and prime brokers in facilitating such activity, and whether the existing Code adequately addresses this form of trading.
Debelle also highlighted that a key issue for the GFXC has been to address settlement risk in the FX market, given the increasing number of trades being settled without PvP (payment-versus-payment) protection.
“Part of the explanation is that the overall share of activity has increased in currencies that are not settled through CLS – the main means for obtaining PvP protection,” Debelle said.
CLS’s FX settlement service, known as CLSSettlement, went live in September 2002 with the support of the central banking community, offering simultaneous PvP exchange on each of the two legs of an FX transaction to mitigate settlement risk.
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According to Debelle, central banks are working to enhance their regular six-monthly surveys to capture more data on the settlement methods used in their markets, to help the GFXC better monitor how participants may be mitigating settlement risk, particularly where PvP services such as CLS are not used.
“The importance of this issue – and the potential size of the risks involved – mean that settlement risk needs to remain a focus for the industry,” Debelle said.
The GFXC plans to strengthen the Code’s guidance to emphasise the need for market participants to sufficiently monitor and manage FX settlement risks, and to maximise efforts to complete settlements to avoid disrupting the market.
