The Global FX Code and its unintended consequences on correspondent banking


The Code does not impose any legal or regulatory obligations on market participants.


The Background to the Global FX Code

The integrity of foreign exchange (FX) markets has been called into question over the last few years following a series of damaging rate rigging scandals. In response to these allegations of FX rate manipulation, a number of leading financial institutions have been forced to pay out billions of dollars in fines and settlements to market regulators globally. Public trust in the FX market’s operating model has naturally ebbed since, prompting Central Banks and financial institutions from 16 jurisdictions to launch an FX Global Code of Conduct as part of a concerted industry effort to restore confidence in the sector.

The Code’s primary objectives

The Code, which went live in 2017, comprises six core principles (governance, ethics, execution, information sharing, risk management and compliance, confirmation and settlement) and 55 supporting ones outlining the standards and conduct requirements which FX market participants across the buy-side and sell-side should adhere to. In essence, the Code supports an FX market which is robust, fair, liquid, open and appropriately transparent1. Impacted firms are also being encouraged to publish a Statement of Commitment to the Code demonstrating compliance with its guiding principles. The Code does not impose any legal or regulatory obligations on market participants, nor is it a substitute for regulation itself, but its guidelines are designed to supplement existing legislation2. At the heart of the code is transparency, as it aims to give end clients a better understanding about what to expect from intermediary providers in terms of trade execution and information sharing3.

The Code’s Impact on Correspondent Banking activities

Correspondent banks are fairly well placed to navigate the changes as the industry has been pro active and made significant progress in remedying inefficiencies in payment processes through initiatives like SWIFT GPI. As a matter of fact, it will bring more transparency on fees and rates to all the parties involved in the payment chain, including in case of FX conversion. In that respect, the industry is behaving consistently with the Code.

Well performing banks are expected to make sure that misconversions do not occur during the cross-border payment process, something which can expose clients to unnecessary FX risks and costs. Meeting this objective implies to predict the currency of the account of destination, which is less straightforward than it seems. The best in class providers also combine low rates of incidents with extremely responsive back-offices, taking immediately in charge undue costs and eventually reissuing the payment in the expected currency without waiting for the recalled transaction.

All these auto conversion schemes are under the scrutiny of banks’ stakeholders as the absence of firm instruction may put the bank at risk. The correspondent banks still converting their payments rightfully argue that the interest of the client is well protected as long as their FX margins are below those applied in the country of destination.

Key points

Correspondent banks’ efforts to continuously enhance their auto-conversion processes and transparency through the SWIFT GPI should put the industry in a strong position to meet the new FX Code’s guiding principles.

1 FSB (November 28, 2017) FinTech, correspondent banking, macroprudential policies and financial market integrity
2 Global Foreign Exchange Committee
3 Euromoney (July 2016) FX: Restoring Trust

Head of Cash Clearing Services Global Transaction Banking - Societe Generale