The Global Foreign Exchange Committee ("GFXC") published an updated version of the FX Global Code (the "Code") and highlighted recent GFXC developments and near-term priorities.

The Code, which was most recently updated in May 2017 (see previous coverage), is a set of conduct standards and principles for foreign exchange ("FX") market participants. The updated version of the Code was revised to clarify when a market participant should pre-hedge client orders.

In an accompanying paper, the GFXC identified its ongoing priorities. These include:

  • strengthening the landscape of FX disclosures;
  • continuing work on cover and deal;
  • implementing a working group on buy-side outreach; and
  • establishing a working group that will focus on further integrating the Code into the FX market.

In addition, the GFXC noted that since the launch of the Code, there has been an increase in:

  • awareness and commitment among market participants, as demonstrated by the widespread use of the Statements of Commitment, the launch of 12 public registers and a Global Index, and continuing international and cross-industry engagement;
  • integration among market participants of the Code's principles into practices, training programs and disclosures; and
  • efforts by the GFXC to continue developing the Code, such as the consultation on "last look" and the updating of principle 17.

Commentary / Nihal Patel

According to the press release, the update to the Code is limited to an "illustrative example" on Principle 11, which states that "A Market Participant should only Pre-Hedge Client orders when acting as a Principal, and should do so fairly and with transparency."

The new example is found on page 55 of the revised Code. The example is not a particularly nuanced case study. In the fact pattern, a client asks for a 75 million USD/JPY bid and the bank has already disclosed that when acting as principal it may pre-hedge anticipated orders. The bank, after receiving the client bid request but before providing a bid, sells 150 million USD/JPY "outside of their ongoing business" and "with the intent of taking advantage of the Client's trade request information." (Generally, if a fact pattern has someone going out of their way and acting "with the intent of taking advantage of [their customer]," it's safe to assume that someone is in trouble.)

Despite the blunt nature of the fact pattern, the response does provide potentially useful color. For one, it indicates that disclosure does not provide carte blanche to trade at will. In addition, the answer notes the intent of the bank and outlines two principles: (1) that any pre-hedging should be "commensurate with the risk borne by the anticipated trade" and (2) that a bank should "consider prevailing market conditions and the size and nature of the anticipated transaction in assessing whether to Pre-Hedge . . . ." Firms that have adhered or intend to adhere to the Code should review and confirm that their FX policies and procedures capture these principles.

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