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Financial Stability Board guidance is positive step

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Marshall Bailey, President, ACI – The Financial Markets Association – welcomes the Financial Stability Board’s latest guidance… 

The ACI welcomes the guidance outlined in today’s report from the Financial Stability Board. It is a positive step for the industry and will provide clarity for markets, investors and global policymakers. The importance and value of these recommendations cannot be understated and is a positive step towards improving the reputation of the FX industry and creating a fairer and more efficient market. 

Global coordination is absolutely imperative if we are to succeed in reforming the market without creating unintended consequences such as regulatory and ethical arbitrage. A code of conduct that applies across all regions should also be introduced if they are to have a real and lasting impact.

We are pleased the FSB’s recommendations are closely in line with many the ACI’s responses to the consultative document, including the widening of the fix window to five minutes. As the ACI has long maintained, it is not the fix that is broken, but rather the manner in which a few individuals use it. 

Restoring faith in the industry and stamping out practices which undermine the effectiveness of the financial markets is a key priority, and the need for consistent education on what is and isn’t acceptable behaviour is paramount. The formal adoption of an international set of standards for ethical conduct and behaviour across the global financial industry will provide clarity and guidance on what is expected of all market professionals, from day traders to senior executives.

The ACI agrees in full with the recommendation of widening the fixing window to five minutes. Lengthening the time frame in which to fix the benchmark rate would limit opportunities for manipulation and make it far less likely that large volumes of business would create distortions in market price. 

Ideally, there would be no confusion about what can and cant be shared, but in reality ambiguity remains, as there isn’t a clear and consistent definition of “private information”. This is absolutely critical and must be addressed by regulators and adopted across all financial markets. A singular definition used across the industry will provide much needed clarity and transparency, and leave no room for confusion.

Regulators should consider employing the more conclusive term, “confidential information” which is clearly defined in the ACI Model Code. 

A central utility is not a panacea, and regulators seem to understand that. It is just one idea that has rightly been consulted upon and there are commercial solutions being developed quite rapidly in the market that are similar to what the FSB has proposed.

The ACI recognises the value of specific utilities for their specific purposes, but concentration in a single global point for trade matching would pose a significant risk for the market in the event of failure. It could result in unnecessary risk and potentially create more problems than it solves. 

CLS is an example of how the market can respond to these kinds of challenges. It was designed to mitigate settlement risk in FX transactions and was backed by regulators and trading institutions alike. Now it is seen as a vital part of FX infrastructure, and demonstrates what the industry and regulators can achieve by working together and coordinating their efforts globally. We would like to see any new central clearing platforms evolve in a similar fashion and the market remain free to decide which solution to use for itself.

The 4pm benchmark broadly works well but although but it certainly needs some repair, which the FSB has addressed, a replacement is not needed. There are already multiple benchmarks available that have not been deployed by the market and are yet to be proven effective.

The 24-hour nature of FX reduces the effectiveness of benchmarks such as VWAP and TWAP, and deployment would be extremely costly and require significant changes in legal documents, client contracts and performance measurement agreements.

The ACI gladly welcomes this recommendation. Formally adopting a code of conduct such as the ACI’s Model Code on a global scale will provide much needed clarity and consistency on ethical behaviour and best practice. Implementing an internationally applicable code of conduct will provide a solution to a number of key issues affecting the industry and underpin the internal procedures set by institutions.

A key advantage of using an agency model is that the costs and risks taken onboard by the price-maker are clear. However, it must be considered that the fees may not accurately reflect the risks taken onboard by the sell-side and therefore the use of this model may distort pricing.  Additionally, it must be ensured that an agency model is kept entirely separate from any principal activity.

At present, the buy-side already has a choice between agency and principal pricing. There are concerns that documenting this option could potentially have unintended consequences.

The buy-side should continue to have options and will likely adopt a model that allows agency and principal pricing.

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