The UK Financial Conduct Authority (FCA) is considering the introduction of tighter rules for the unregulated FX spot market by implementing a FX Global Code. The goal is to bring the FX spot market in order to bring it in line with the regulated markets of other financial instruments, said FCA’s Head of Markets Policy Edwin Schooling Latter at the FX Week conference in London earlier this week, quoted by media.
In his presentation Latter noted that the FX spot market “sits in an interesting place on what we call our regulatory perimeter” and is regulated only under certain circumstances. In Latter’s words, however, this does not mean that the FX spot market is less important or is not of acute interest to the FCA as a regulator. “It does mean, however, that there is not such a well elaborated body of regulations and rules as there is, for example, in equity, fixed income or derivatives markets,” Latter said.
Hence, Latter noted, the FCA and the industry are currently working on a FX Global Code, which is expected to be completed next May. The project is with the active participation of the senior management of the 30+ firms covering around 70% of the UK-based FX market. The Code focuses mostly on trader misconduct, breaches of client confidentiality and the failure to manage conflicts of interest.
Among the main issues, according to Latter, is the practice of “last look” advertising a price, but reserving the right, when a client asks to trade at that price, to reject the client’s order. It would be useful for the clients to be able to use that price and for the markets – for price discovery and for accurate valuation even for those who do not intend to trade. For this reason in the regulated markets for some financial instruments there are requirements for certain advertised prices to be executable and some experts argue that the “last look” practice be prohibited as in their opinion it is out of place in a liquid market such as forex.
The FCA representative, however, noted that he would not argue that “last look” should be prohibited altogether. “I think there is an argument for letting market discipline and customer choice determine if and where last look continues to exist,” Latter said. “But if market discipline is to work, there must also be transparency about the practice.”
In Latter’s opinion the FX Global Code would give an opportunity to eliminate the conduct risk of pre-hedging and then rejecting client orders through “last look”, without fear of competitive disadvantage by safeguarding against misuse of client information.
Other significant issues in the FX spot markets outlined by Latter are the practices of mark-up and time-stamping.