Is a global set of rules for the FX industry imminent?

Since the US government took the initial step toward conducting a complete overhaul of the FX industry’s modus operandi from the ground up within comprehensive sections of the 2010 Dodd-Frank Wall Street Reform Act, the entire structure of the electronic trading business has been subject to regulatory review worldwide.

Regulatory authorities in regions synonymous with FX trading followed the lead initiated by the United States, in order to create a greater regulatory supervision and more transparent environment for OTC trading, ranging from the infrastructure which executes trades to the reporting and supervisory practices required by brokers.

The global and borderless nature of the FX trading business has resulted in nations such as Britain, Australia, Canada, Hong Kong and Singapore, all important electronic trading centers, to sign a memorandum of understanding in conjunction with the US Commodity Futures Trading Commission (CFTC) in order that cross-border regulation of FX trading activity can be facilitated more easily.

This has now gone a stage further, with the Bank for International Settlements (BIS) having established a working group in order to install a single global code of conduct for the foreign exchange market.

The working group will work closely with central banks across the world, and will be headed by Reserve Bank of Australia Assistant Governor Guy Debelle, the co-author of recommendations drawn up last year for reforming “fixing” benchmarks after two years of scandal over their alleged manipulation.

Indeed, the Dodd-Frank Act’s tenets were able to reform the OTC FX trading industry and influence other global regulators to follow America’s lead with substantial reinforcement of consumer protection for retail clients, however the trading desks among large banks manipulated FX rates post Dodd-Frank Act to such a degree that the regulatory fines of $4.3 billion issued to the banks concerned by Swiss, US and British regulators did not see an end to the investigations, as class action law suits and criminal investigations followed.

Reuters reported last week that a number of senior central bank officials were for the first time optimistic about unifying the disparate codes of conduct used in different jurisdictions into one central document.

The central bank officials concerned stated that the need to show the industry is taking action to prevent future abuses could override traditional divisions between the biggest banks and market centers such as Tokyo, London and New York in a market that has never been formally regulated.

James Kemp, Managing Director for Global FX at the Global Financial Markets Association (GFMA), welcomed the BIS move and said there is a very strong desire for coordinated alignment of regional codes.

“This is an opportunity for market participants to work with regulators and supervisors to demonstrate that they can put the right controls and guidance in place,” he said in a statement. “As demonstrated by various initiatives already under way, the GFMA’s FX Division is highly supportive of this initiative.”

The push for a single set of standards is likely to be shaped by Britain’s Fair and Effective Markets Review of conduct in currency and other markets, which is due to report in June and will need international backing to have any global impact.


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