The American Foreign Exchange Committee (FXC) has issued one of its letters last week addressed to all “Market Participants”. The FXC is an FX industry group that has been providing guidance to the market since 1978.
It is made up of senior representatives of major financial institutions in the US FX market and meets under the auspices of the Federal Reserve Bank of New York.
The letter deals with the issue of some market participants shifting the burden of enforcing internal policies and controls that are set internally to the external market maker in a communication of which the most common form is an “authorization (sic) letter”. The letters it is noted in the release: “attempt to shift the burden of enforcing compliance with internal policies and controls from the participant to the dealing firm, and are generally inconsistent with good practices in the wholesale foreign exchange market.”
It then concludes “Letters and other documentation that purport to unilaterally shift the burden of enforcing compliance with internal policies and limitations to a market counterparty, or that may have that effect, however, are generally inconsistent with good practices in the wholesale foreign exchange market and, as a matter of law, may raise serious issues regarding enforceability.” I can certainly recall dealing with many of these letters in days gone by and they were, to not put too fine a word on it, a pain in the proverbial. It is worth noting that, in my experience, almost all these letters came from the buyside with their popularity higher amongst corporates than large Asset Managers. Technology that obviates the need for such letters is available and therefore we should be utilising it.
This also deals with a critical principle in an OTC Wholesale Market when the participants are trading with each other as market principals. As is further stated – “The Committee has consistently taken the position that wholesale foreign exchange market participants are responsible for ensuring compliance with their own internal policies and procedures.” As I have blogged in other posts, the FX Global Code (GFXC) that binds market participants together is an essential part of how they should behave and the letter reminds market participants to refer to the FXGC for more information regarding expectations as to how all parties transact in the FX market.
For me one of the key benefits of the FXGC is exemplified by this. As I recently remarked we need, through all of us signing up, to adhere to the FXGC to create a level playing field between all market participants – “it takes two to tango”! Most transactions are governed by an ISDA, which is between two market participants acting as principals to each other, and taking responsibility for their own actions and this includes the choice of execution strategy as well as how it is executed. So whether sellside or buyside both parties must have in place the necessary technology to police their own affairs and this should ensure the ability to show that they routinely achieve the best possible outcome for their stakeholders.Finally a note from Europe, more pertinently from the European Association of Corporate Treasurers (EACT). The EACT have launched a Public Register for non-financial corporations to register their adherence to the FXGC - https://www.eact.eu/fx-global-code. Let us hope that we see many more entries registering over the summer to augment the first six trendsetters. As stated by the EACT they have welcomed and strongly supported the FXGC and are promoting it to their members by encouraging them to evolve their institutions’ FX practices to be consistent with the principles of the code. Watch this space for news of how technology can be harnessed to achieve this important adherence going forward.