Following proposed updates to the FX Global Code, the FXPA has highlighted that the revised rules could unintentionally lead to new risks, whilst also complicating operations, without clear benefits for the market.
The FX Global Code are a set of industry guidelines aimed at keeping global currency markets fair and transparent.
The Global Foreign Exchange Committee (GFXC), responsible for maintaining standards in the global FX market, has proposed changes to its FX Global Code, which was established to provide guidance on how currency trades are carried out globally, with the goal of encouraging integrity and transparency.
This marks the second iteration of the GFXC’s global FX code in the form of a public consultation, six years on from its inception.
Read more: Key updates to the FX global code to be revealed in October
The FXPA highlighted these updates as being well-intentioned but flawed, namely due to the overly complicated language used in the proposals and the lack of practical detail.
The industry group argues that the GFXC didn’t provide enough background to explain why each rule change is necessary. In addition, the group noted that the 16-day feedback window was tight, given the global and highly regulated nature of the FX market, with participants operating under various regional rules.
Among the proposed rule changes, firms have been encouraged to reduce settlement risk by using a one-size-fits-all method called a “risk waterfall,” which prioritises payment-versus-payment (PVP) settlements.
The FXPA highlights that despite this approach potentially being safer, it may not work in cases where trades happen within a single institution, like a bank settling transactions between its own clients. The association argues that in such situations, PVP could actually increase risk and add unnecessary complexity.
“The GFXC’s suggested updates to principle 35 to use PvP processes where practicable is not prescriptive enough. With vague definitions, every firm will choose to apply its own definition of where PvP mechanism are practicable, leaving settlement risk on the table,” said Alex Knight, head of EMEA at Baton Systems.
“As we have seen in recent years, there is ample evidence of technologies in deployment right now that facilitate riskless settlement and netting, eliminating many situations where PvP is not possible.”
Basu Choudhury, head of partnerships and strategic initiatives at OSTTRA, agreed that PvP is the preferred method for mitigating FX settlement risk.
“By far the largest proportion of FX trading is conducted with the primary dealers (bank and non-bank), for whom the ‘on-us settlement’ model may not be feasible, and all parties in the chain (non-bank LPs, FX dealer, asset managers and custodians) must deal with and manage settlement risk,” said Choudhury.
“Access and integration to flexible PvP models would enable the asset managers to execute across a larger pool of dealers as daily settlement limits (DSL) could be increased, leading to more efficient execution opportunities.”
Elsewhere, the GFXC has proposed that it wants FX platforms to disclose more information about “client interaction data”. In response, the FXPA argues that the new language is broad, covering too many types of information and leaving room for confusion.
The association also noted that without clear definitions, the rules can be interpreted by participants differently, creating inconsistencies and additional compliance challenges.
The proposed updates would require that all FX trades be governed by a written agreement, with this extending to include minor and/or informal interactions.
The FXPA highlighted that from a practical sense, this could make routine trading much more complicated and slow down transactions reliant on fast communication, such as messaging apps.
The GFXC also proposed changes around how Standard Settlement Instructions (SSIs) are used. The revised rule would discourage the use of multiple SSIs for the same counterparty unless absolutely necessary, with the goal of reducing settlement errors.
Although the FXPA agrees with the sentiment that minimising SSI variations would have benefits, they urge more flexibility in cases where alternate SSIs may be operationally necessary. The associations warns that strict rules on SSIs could make settlements cumbersome without substantial gains in safety or transparency.