Rohan chaired the GFXC's Disclosure and Transparency Working Group, comprised of a diverse range of FX market participants.
He looks back over the key issues in the disclosure landscape, the engagements the group had with the wider FX market, and the solutions the group developed.
I’m here to talk about FX market transparency and how the Global Code Review will support it. Guy Debelle spoke yesterday to summarise the outcome of the first three-year Review (Review) of the Global Code (Code)footnote . As he told you, many of the changes in the Review are designed to bring about greater transparency in an increasingly complex market. And I will focus on the disclosures aspects, particularly the new Disclosures Cover Sheets.
I’ll talk about why change was needed, including the feedback received from market participants during the review process. I’ll cover the process the Disclosures Working Group went through to identify key issues, and the solutions we think could address them. And I’ll spend a bit of time talking about how the new Disclosure Cover Sheets might be populated and used. In doing so, I will also touch on what they are not intended or able to do. Finally, I’ll cover the timeline for implementation, and then I am very interested in your questions.
Before diving into the content, I wanted to briefly reflect on the current situation.
The virtual environment
Less than two years ago, the idea of a virtual forum like this would have been alien to me. And if I am honest delivering a speech from my dining room is still not quite natural. But there are benefits. The FX market is global. It is great to be able to engage with people in different continents without the carbon cost of flying. In return we must all aspire to be fluent in multiple different conferencing software packages from our laptops.
As Head of Foreign Exchange Division at the Bank of England (Bank), I am responsible for all of our Foreign Currency operations. That includes managing the UK’s FX reserves, and serving our customers including government departments and other central banks. Before the Covid crisis, staff in the department could work from home, and many did. But all trading had to be done from the Bank’s dealing room, or the contingency site.
It feels like old news now to say we were positively surprised by our ability to operate with staff in their kitchens, bedrooms, and garden shedsfootnote . And the Bank of England was far from unique – the market learned to adapt, fastfootnote . At the Bank our main base for operations has been ‘home’ ever since. As we plan for the future we do want staff to come back to the office and interact in personfootnote . But there is no vision to return to the world of January 2020.
At this point you may reasonably be asking how this relates to the Global Code. So let me set that out.
Innovation is not only good in general, but it can be critical. If the Bank were unable to adapt to the pandemic in spring 2020 we would have failed in our mission. The Code is set of principles of good practice in the foreign exchange market. It supports a diverse range of market participants and business models. It aims to focus on what should be done, not precisely how it should be done. This enables practices to adapt.
This principles based approach also means that the Global Foreign Exchange Committee (GFXC) has resisted adding excessive detail to the wording of the Code. Rather than prescribe a single type of acceptable behaviour, the GFXC has often chosen the route of ensuring that there is sufficient transparency for market participants to make informed decisions regarding the nature, impact and risks of their interaction with each other.
The foreign exchange market adapted particularly rapidly in early 2020, but it is always adapting. With the benefit of hindsight it is easy to think of reasons it was able to function with so many people working at home. As a genuinely global market it was already possible for participants to trade with each other from very different locations. And as an electronic and increasingly automated market there were growing shares of trading decisions taken virtually by pre-programmed algorithms running in server centresfootnote . Meanwhile, turnover keeps hitting new record highs.footnote 
The constant evolution of market technology and structures means that the Global Code needs to evolve to stay relevant. A past issue with some industry codes was that they were not updated and became stalefootnote . To avoid repeating that mistake, the GFXC has the responsibility of maintaining and updating the Code on a regular basisfootnote . The Bank is a strong supporter in general of market codes of conduct, and ensuring that such ‘soft infrastructure’ keeps up with technology and other hard infrastructurefootnote . The Code was first published in May 2017. That is a long-time ago in a fast market like FXfootnote . Around 20 billion five millisecond price feed windows in factfootnote . Changes will be needed again in future.footnote 
The final link is my role. The Bank engages in GFXC, and with the London FX committee, not as a markets regulatorfootnote  but as a convenor of different market participants, to support collective actions.
But we are an informed convenor. Our engagement is informed by our presence and operations in markets every day, and by our conversations with an ever more diverse range of market participantsfootnote . I could see that there was room for improvement in disclosures, and was excited to get involved in that aspect of the Review.
Background to the disclosures working group – why was change needed?
I did not have any special foresight in thinking transparency would be an important part of the Reviewfootnote . Indeed, transparency and disclosures have always been important to the Code. From the start the Code outlined their importance across several principles, such as Principle 11, which says that market participants should be transparent if pre-hedging client orders, or Principle 14, which sets out a series of things that should be disclosed around Mark Up. After initial publication of the Code in 2017, a large number of market participants reviewed and improved their disclosures. The GFXC supported this with a guidance paper on disclosures and transparencyfootnote . Amongst other things this paper developed a list of characteristics of good disclosures as a voluntary tool to strengthen the disclosure landscape by increasing awareness and dialogue between market participants around business practices.
At the same time, and despite these efforts, there was feedback from market participants that disclosures were variable, and that the adequacy of some elements of disclosures remained an issue. That feedback included the 2019 GFXC surveyfootnote , carried out ahead of the three-year Review. The GFXC Disclosures Working Group was one of five working groups set up as part of the Review. Its role was to identify the key issues still present in the FX disclosure landscape and then formulate solutions.
I was asked to Chair that working group and was fortunate to be supported by a diverse group of market participants from different jurisdictions, market segments (buy-side, sell-side, platforms), and business areas. Each of those participants was also aiming to bring the experience of their work and conversations with others. I have had a lot of conversations about this topic over the past few years. I was also informed by the Bank’s experience accessing, comparing and understanding our counterparties’ disclosures, for the purposes of our operationsfootnote .
In terms of scope we aimed to identify a small number of key issues where solutions could make a practical difference.
We thought about those in the framework set out by the first disclosures and transparency group, considering: Content; Clarity; Accessibility; and Review. We considered changes in market practice or structure since the launch of the Code. And we recognised the need to complement other working groups, for example:
- The Anonymous trading working group would consider the role of trading venue providers and prime brokers in facilitating disclosures.
- The Algos/Transaction Cost Analysis (TCA) working group would consider guidance around TCA for increasing transparency around algorithmic executionfootnote .
- The Trading principles working group would consider three Code Principles – capacity, pre-hedging, and last lookfootnote  – which were also areas where there had been some less positive feedback around disclosures.
Through discussion among working group members, engagement with market participants, review of the 2019 GFXC survey results and an assessment of these views against the Code’s already existing expectations for disclosures, the group came to a collective view on the key issues in the disclosure landscape (see Figure 1).
Proliferation of information – a hurdle to accessibility and review
First, it was generally appreciated across the market that there had been genuine efforts to improve the content of disclosures over the prior three years. But these efforts may have, in turn, led to a proliferation of information provided to market participants. Several different sets of disclosures can be produced, with some publicly available and others provided bilaterally, depending on the intended purpose of the material. Disclosure documents are reviewed and updated at different times by different counterparties, and there is no central repository of multiple firms’ disclosures. This can create particular challenges for buy-side firms in consuming and managing the volume of information provided to them by counterparties.
Inconsistent content in key areas
Second, there remained a set of key topics to which disclosures are unclear or lacking relative to the Code’s expectations. Topics discussed in this bracket include last look practices (length of window, asymmetric vs symmetric application, trading in the last look window, cover and deal), pre-hedging, and clarity around whether a market participant is acting as a principal or agent. For instance, Principle 17 on Last Look states that “Market Participant[s] should disclose, at a minimum … the expected or typical period of time for making that decision [to accept or reject the trade]”. Given the heightened interest in these topics, they would benefit from more consistent sign-posting across market participants’ disclosure documents.
Unclear language and legalese
Third, working group members stressed the importance that relevant business areas are heavily involved in the drafting of disclosures, ensuring the documents clearly reflect a firms’ trading practices and are easily interpreted. It was agreed that there is a role for compliance and legal areas in holding the pen on disclosure documents, often being an effective conduit between different market areas. But it should be recognised that in isolation this can lead to unhelpful use of legalese and a lack of “Plain English”.
Uninformative reject codes
Fourth, there are elements of the disclosure landscape not currently covered explicitly within the Code or that would benefit from further clarification. Notably, standardisation of reject codesfootnote  was a topic the working group was aware of as being in focus for some market participants.
In considering possible solutions to these issues, the working group concluded that disclosures provided by different types of market participants require different focuses – notably trading platforms have a different set of considerations for their disclosures compared to other market participants. So whilst some issues are pertinent across the full range of market participant disclosures – e.g. those relating to accessibility & review – others only relate to a sub-set – e.g. disclosures of certain “key topics” including last look and pre-hedging. Recognition of this point is crucial for the success of any greater standardisation.
Key solutions identified
Before talking about solutions, I want to recall that the Code is about Principles. And the Working Group wanted to focus on a small number of practical changes that would make a material difference. As you might then expect, the group did not propose a new response to all of the issues identified above. For example, the group has not attempted to define “Plain English”. Although I do hope that the material we have produced, and the guidance that will accompany it, does avoid unhelpful legalese.
In fact, we narrowed solutions down to three.
First, to include more explicit references in the Code to the provision of information around trade rejections. This reflects the growing importance of TCA in a fragmented electronic trading market utilising last look. A buy-side firm carrying out TCA to compare the service received from different counterparties needs information on why some electronic trade requests and/or orders have been rejected. Principle 9 of the Code now sets out that market participants should make clear up front the basis on which trade requests and/or orders might be rejected. And Principle 36 sets out that market participants should keep an accurate and timely record of the reasons behind electronic trade request and order rejections, consistent with the reasons set out under Principle 9, to be able to provide transparency to Clients.
What this means in practical terms is that clients should know in advance the reasons why trade requests could be rejected, and can if they wish receive reject code information on any trades that are rejected, that should map to those reasons. Market participants can then more easily analyse that information and use it to make an informed choice about their counterparties.
It is worth noting that a large number of market participants would have preferred more standardisation here. By that I mean the GFXC setting out in the Code a standardised set of reasons for trade rejects, which could then be most easily compared across liquidity providers. Of course this ease of comparability could come with costs. So there is a trade-off. And a large number of market participants were explicitly against further standardisation. So after discussion and feedback from FX Committees across different jurisdictions, the GFXC set out the principle that clear trade rejection information should be provided to clients. Exactly how that occurs is left to the market. And some market-led initiatives to promote further standardisation have emergedfootnote . That is how a principles-based market-led Code works.
The second solution is that the working group has created templates for Disclosures Cover Sheets. These Cover Sheets will enable a summary of headline information on key topics, along with links to the relevant underlying disclosures. The aim is to make it easier for market participants to quickly access and navigate those disclosures. Reflecting the diversity of market participants, there is no one size fits all approach, with separate Cover Sheets for liquidity providers and for FX E-Trading platformsfootnote .
The third solution is related. The market-led public registers will allow posting of Cover Sheets. And the GFXC’s Global Index of Public Registers, which draws in information from the market-led registers, will be adapted to also be a central repository of Cover Sheets. These steps should significantly improve the ease of review.
The GFXC published draft Disclosure Cover Sheet templatesfootnote  in April as part of the public request for feedback, and the feedback received has now itself been published. The final templates and associated guidance material will be published in August, alongside the publication of a Guidance Paper on last look. This allows us to ensure the Disclosure Cover Sheets are consistent with other Code material. That is an important principle behind the cover sheets. They do not introduce any new expectations, but act as an accessible contents page into understanding market behaviours and discussing them with counterparties.
Disclosure Cover Sheets in practice
It makes sense at this point to consider how Disclosure Cover Sheets can be completed and how they can be used.
A Cover Sheet should be fairly straightforward to complete. The templates consist primarily of checkbox answers and boxes to add hyperlinks to the relevant underlying disclosuresfootnote , with limited room for a short narrative. In order to check that they were indeed straightforward, we ran a pilot with volunteers from a set of market participants privately completing cover sheets. It took two weeks for the final one to come back. One participant took just half an hour! I recognise that when things are live firms may take a little longer to go through formal processes. And it may take some firms longer if they recognise during the Cover Sheet process that they wish to amend their underlying disclosures, which would be great by the way. We will be accompanying publication of the templates with guidance and FAQs on the GFXC website to support those completing and posting themfootnote .
For example, asymmetric price checks during the last look window introduce greater complexity for liquidity consumers in monitoring the effectiveness of their execution. It is therefore particularly important for liquidity providers using it to disclose that, and for liquidity consumers to understand the circumstances in which they are used. The draft liquidity provider Cover Sheet includes a specific box to highlight if asymmetrical last look is ever used, and a space to briefly describe the circumstances if so. For example, is it by default, or only by request? The underlying disclosures should provide more precise detail.
I can conclude this section by just summarising some things that the Cover Sheets will and won’t do.
- They will not be obligatory
- They will support market participants in meeting the range of disclosure and transparency principles in the Code
- They do not introduce any disclosure expectations that are not in the Code
- They will make it easier to access and review underlying disclosures
- It will not be possible to be sufficiently informed using only the Cover sheets
- They will empower clients in requesting transparency in line with Code principles
- They do not force standardisation of all disclosures
- They will allow market participants to maintain control of their underlying disclosures
- They do not prevent innovation to improve underlying disclosures
The intention is thus that the Cover Sheets will help support informed choice and competition.
The path from here
I will finish by briefly outlining the timeline for implementation.
The updated Code text is live already, and includes the changes regarding reject codes I mentioned earlier. The Disclosure Cover Sheet templates should be published in August, along with associated guidance and FAQs. At that point liquidity providers and E-Trading platforms can start preparing their Cover Sheets for publication. Some changes need to be put through the Global Index and other Public Registers in order for them to hold the Cover Sheetsfootnote , and so I would expect the first Cover Sheets to be going live towards the end of this calendar year, in time for Christmas. But I trust their support for informed choice and competition in the market will be for life.
To conclude. Many of the changes in the Review of the Code are designed to bring about greater transparency in an increasingly complex market. This should promote informed choice and competition.
Disclosures Cover Sheet templates for liquidity providers and FX E-Trading platforms will be published in August. They will be straightforward to complete. And they will help market participants evaluate the information disclosed to them.
I would like to thank Ed Kent for his help in preparing the text and graphics. I also thank Sadia Arif, Andrew Butcher, Grigoria Christodoulou, Andrew Hauser, Maggie Illingworth and James O’Connor for their comments and contributions. The solutions described in this speech reflect the GFXC process, notably the market participants who joined the GFXC Disclosures Working Group. However all of the opinions, particularly any errors, are my own.
See (Debelle 2021)
Andrew Hauser, Executive Director for Markets, covered this observation across the Bank’s Market operations in his Seven Moments in Spring Speech. I talked about the functioning of the FX markets in near-time in an April 2020 ?podcast interview.
As set out in this note for GFXC by GFXC Co-Vice Chair Neill Penney
The Bank’s Deputy Governor and COO, Jo Place, has spoken about the Bank’s broader approach recently in her talk on the Future world of work.
For example, much of London’s spot FX market trading ‘happens’ in Slough. See Churm (2019)
The latest FXJSC turnover survey for April 2021, released yesterday, showed average daily reported UK foreign exchange turnover reaching record highs: $2,985bn in April 2021. This represented a 16% increase relative to October 2020 and a 24% increase compared to April 2020. Over a longer period growth has been particularly strong in FX swaps, rather than spot, as set out in Goodacre and Razak (2019).
This was a point identified in the Bank of England’s Fair and Effective Markets Review.
Specifically, one of the GFXC’s three objectives is to promote, maintain and update on a regular basis the FX Global Code (the Code) and to consider good practices regarding effective mechanisms to support adherence.
As set out for example by Mark Carney in 2018
For a definition of ‘fast markets’ and discussion of their implications for central banks, see the Markets Committee report on monitoring of fast-paced electronic markets. In that report fast-paced electronic markets are broadly defined as markets where the price discovery process predominantly occurs via electronic means and which are characterised by a sizeable penetration of high-speed, algorithmically driven order placements.
Of course this is just for one currency pair, on one platform. The actual amounts of data now created and stored in the FX market are enormous (Hauser, 2019).
The Financial Conduct Authority is the markets regulator in the UK.
This is through the Bank’s Market Intelligence activities. The BoE’s market intelligence gathering staff specifically aim to meet a diverse range of market participants and has recently launched an initiative to go further, as set out in the Meeting Varied People initiative launch speech by Andrew Bailey.
The GFXC leadership were clear in their expectations it would be a priority - GFXC Priorities for the 3-Year Review of the FX Global Code
Andrew Hauser talked about this review of our counterparties’ disclosures in his 2019 speech at Tradetech FX. He said that “Most covered the topic headings we would expect to see, and the best scored well across a broad range of criteria. But few had been reviewed since the GFXC’s guidance came out. And in general we found significant room for improvement, in particular on clarity and accessibility.”
For more information on the - growing - use of execution algorithms, against the backdrop of increased fragmentation and automation in the FX market, see the Markets Committee report on FX execution algorithms and market functioning.
Principles 9, 11 and 14.
Reject codes are sent to a client by a price maker to provide explanatory information as to why an electronic trade request has been rejected. This practice is in line with the 2017 Code’s Principles for Market Participants to be clear and transparent in the way orders have been handled, though the 2017 Code did not specify whether and how reject codes might be used in this process.
In the UK the Investment Association has published a position paper
Relatedly, the Algos/TCA working group has produced an Algo Due Diligence Template and a Transaction Cost Analysis Data Template, to assist users of algorithmic trading services in evaluating the quality of their trade execution.
For E-Trading platforms these disclosures are typically known by others names. But the same principle applies, to link to the relevant Rulebook, User Guide, Operating Procedures, or similar documentation.
These are intended to work by reading a link, not by upload of a document, so that a market participant retains control of the content of their cover sheet by updating the contents of the link, which might sit on their website.