Implementation of a global code of conduct for forex brokers

Article by financemaganates:

Remember the Forex Global Code of Conduct? – Yes, the document which was published almost 24 months ago by the Bank of International Settlements. It was supposed to usher in a new era for global foreign exchange trading after the price manipulation scandals tarnished the reputation of the forex industry.

It actually does already serve its purpose, primarily with an additional regulation layer in the relationships between the buy and sell sides of the forex sector. The institutional side of forex has largely committed with all major brokers and electronic trading platforms complying with the standard.

While retail clients are not covered by the code, retail brokers are. A key aspect of the document, however, is that participation is voluntary. The idea behind the drafting of this forex Global Code of Conduct was that as national central banks sign up, so will commercial banks, followed by forex brokers.

The adoption among central banks globally has been rather broad. Commercial banks that are constantly dealing with forex followed through and are largely committed to the document. Electronic trading platforms and institutional brokers have been actively engaged as well.

Once we get to the cream of the crop of the retail forex sector, though, things are becoming different. To date only three non-bank prime of prime brokers have signed up to the code. Granted, there are those which are themselves bank subsidiaries, and this number excludes them, but the number is still too low.

Coverage of forex brokers

Buy-side firms on the institutional side of the industry started choosing their partners based on their acceptance of the code about a year ago. The structure of the Forex Global Code of Conduct was designed to eventually trickle down to all participants.

That said progress has been slow since the adoption of the Code two years ago. The trickle-down effect across the valley chain of the industry which is integrated into the code is slowly accelerating the more participants sign up to it.

Currently, 820 financial institutions have committed to the code. These numbers include central banks, commercial banks, non-bank liquidity providers, brokers and investment advisors, technology and infrastructure providers and others.

The speed of the adoption has risen sharply in recent months and in order to avoid being ill-prepared, retail brokers and technology providers within the retail industry might need to look into signing up.

The code is not difficult to understand and is very proportional in terms of its application. The expectation is that the company will follow basic ethical principles within the organisation.

Risks to the forex sector

In the midst of the ESMA regulations imposing themselves on the sector and forcing many players to rethink their approach to the market, those firms that sign up to the code can actually gain a significant advantage among those lucrative clients that can reclassify to professionals.

Two particular points are important – firms that adhere to  the Code cannot behave in a way that causes the triggering of a client’s stop-loss order. Also, they can not operate in an environment that can cause market disruption.

Only these two basic principles are already having a major effect on the trading experience of retail clients, which, according to a recent Greenwich survey, constitute about a third of global forex trading volumes in spot forex.

The risk warehouse retail forex has become a fundamental part of the foreign exchange market. Right now the forex sector can't afford to be seen by regulators as a sector of the market that exacerbated flash crashes to the extent that complex multiyear derivatives may be triggered.

If the markets overreact in times of illiquid conditions, the retail forex industry can become a scapegoat, which is the last thing it needs during this difficult transition period due to new regulations.

Adhering to the Forex Global Code of Conduct is ultimately beneficial for all market participants. While there is a controversy as to how far it should have gone on some measures, the current document is the best we have and avoiding it for too long can only lead to more scrutiny.