Central Banks are clearly significant clients in these markets and their commitment sends a message to their broker dealer counterparties. Whilst the BoE has not categorically ruled out trading with firms that have not committed to the codes, it has nevertheless warned that it “expect[s] regular counterparties to commit to embedding these principles of good practice in their market activities.” The may be the catalyst for more firms to come forward and publish a signed commitment. Progress in that regard has been slower than expected. At the time of writing – some 9 months after the Global FX Code was published - a register of signed commitments to the code published by CLS (whilst not necessarily exhaustive) only includes 7 sell-side firms.
The codes are not legally binding and many of the markets covered by them are not regulated (e.g. spot FX, wholesale lending and physical commodities). Nevertheless, these voluntary codes are gaining increasing significance in the eyes of authorities and regulators. The FCA issued a consultation in November 2017 looking at the status of industry codes of practice in non-regulated markets. The consultation makes clear that the FCA expects senior management to consider these industry codes when determining proper standards of market conduct pursuant to individual conduct rule 5. The FCA also welcomed the codes when they were first published and confirmed its expectation that market participants take notice of them.
Staff at authorised firms should already be aware that individual conduct rule 5 (observing proper standards of market conduct) applies to behaviour in respect of both regulated and non-regulated activities (COCON 1.1.6 and 1.1.7). In that sense, there is currently a mis-match with the requirement on firms to observe proper standards of market conduct pursuant to Principle 5 (which only applies to regulated activities). In its November 2017 consultation, the FCA sought to close that lacuna by proposing to extend the scope of Principle 5 to non-regulated activities. This will lend further prominence to the industry codes.
In short, firms should take little comfort from the voluntary nature of these codes and should instead train their staff on the new guidance and ensure their policies are procedures are consistent to the extent proportionate and appropriate. When ready to do so, firms should consider signing and publishing a statement of commitment. The wording of the pro forma statement of commitment already incorporates the concept proportionality in the firm’s implementation by referencing the “size and activities” of the firm. A firm that has embedded the codes into its procedures, trained its staff accordingly and published a statement of commitment will mitigate the risk of being blackballed by counterparties or taken to task by regulators.
If you would like to discuss the voluntary codes and what firms should be doing to ensure compliance, please do not hesitate to contact me at Oran.Gelb@blplaw.com