Transcript of Question & Answer Session The Global Code of Conduct for the Foreign Exchange Market

Thanks Guy. Last year you spoke a fair bit more about benchmarks and the operation of particularly the London 4pm fix, have you seen or can you make any applications on what may be progressed since that time?

Yeah, couple of points. So first of all, we talk about order handling around benchmarks in the Code. So we pick up the stuff that was in the recommendations that Paul Fisher and I put out, it must be two years ago now, on handling fix orders and that's exactly reflected in the current draft of the Code. In terms of where things are up to on that, I'm just trying to remember I've lost track of time here, about six months ago I think it was, we looked at how those recommendations have been implemented around the world. Most, but not all, institutions are charging for fixing transactions along the lines that we recommended. The most notable change obviously was that the London 4pm window got widened to five minutes. That does seem to have affected the dynamics around that and we put out some work last year which showed that. As I said, that change happened, I suppose the most material change or the most obvious change to me, is that the way that banks actually handled fixing orders has changed quite considerably. So one of the recommendations we put out was to separate the handling of fixing orders from other orders. That has by and large happened. One outcome of that is that we've seen a very large increase in algo execution of fixing orders. A lot of banks have implemented that by basically having all their fix orders handled by algos, and that seems to have also affected the dynamics of the trading through the fix.

I think initially at least some of those algos were fairly straightforward, they looked very much like a VWAP which just smoothed, pretty much evenly distributed, the orders right across the five minute window. I think as people have noticed that, we're started to see more sophisticated, for want of a better word, execution strategies being put in place, still algo executed. So I think my sense is that that's in a better place than where it was, I think most, but not necessarily all, of the outcomes we were looking to achieve with that have happened, at least for London 4pm. I suppose I make the point that while most of our recommendations are being implemented for the London fix, that's not true for fixes elsewhere in the world, where there's probably more scope for improvement, put it that way.

The only other thing I'd note is that WM, who actually runs or owns the London 4pm fix, has now actually set up a user group of market participants so that market participants are now able to provide feedback as to how they see the fix working and any changes that include whether the window needs to be wider or different for different currency pairs. There's now the opportunity for market participants to provide that directly to WM that wasn't there in the past. So that hopefully will lead, you know, as the market continues to evolve, the fix will be able to evolve with it.

Guy you talked about the fact that the Code is going to be effectively a living code when it's finally finished so it won't stop in terms of its development. So does the Committee have criteria around what will be regarded as a fully functioning market?

Sorry in what? I don't quite get the sense of what you meant at the end.

So when you're looking at the Code and making changes and adjusting it, what will determine when you have to make changes, are there criteria that you're going to be looking at that says yes this is fully functioning, no we've got to hit that, that, that?

So I don't want to commit ourselves to anything because we're still trying to work out the answer to that question, including the structure of how that will be handled. So one possible process, which I'm not going to say is what we're going to end up doing, but one would be again I think we'll provide the opportunity through the various FXCs for market participants to say, okay things aren't working, this is an area which needs to be addressed. I would guess that's got a fair chance of being at least one way that that happens, so there will be opportunity for market participants to say, okay I think things aren't adequately addressed in this area, it needs some work. The other thing which I think, and again without committing ourselves, this is something which we haven't agreed on yet, but I think one thing which wouldn't be helpful is this thing keeps on changing on a high frequency basis. Because people have to have some understanding of what's in there and shouldn't be needing to keep on checking every six months or so as to whether it's changed. That said, 10 years is probably too long, and so one possibility would be as we noticed some new areas of the market appear, or new practices appear, address them on a higher frequency basis, and then on a slightly lower frequency basis we can look for a wholesale review of the Code. But I think in terms of how it will evolve in the future, I think will be very much be informed by what market participants are seeing as well as what we are seeing in the market.

Guy Debelle, Carrington Clark from Sky News. We've had the Federal Reserve last night indicate that they're probably only going to raise interest rates twice this year, markets seem to breathe a sigh of relief on that we saw them move. Do you think we're seeing the end of the heavy volatility that we saw at the start of 2016? But the second part of that question, do you think that's probably going to take some pressure off the Australian dollar in the short-term, obviously it's hovering at a point that maybe the Reserve Bank isn't comfortable with, how do you think that's going to play out?

So on the second question, I can read out verbatim what the Deputy Governor said last week, because my answer is going to be exactly the same as what he said. Which is every central bank would appear to like a lower currency, some say that openly and some don't actually articulate it, and possibly the Fed, but I think most central banks want lower currencies for whatever reason: pushing up inflation or creating a bit more activity, I don't think we're any different from that, but obviously everyone can't have a depreciating currency, that's what happens when you have relative prices. So as I said we would welcome a slightly lower exchange rate like everyone else in helping the rebalancing of our economy, but obviously not everyone can have that.

On your first question predicting the end of volatility, I don't know I'm not sure we're done with volatility for the year, would be my guess. I can think of a decent amount of event risk around about the middle of the year emanating from places in the general vicinity of Europe, so as I said I'm not sure we'll necessarily have a repeat of January and February, but I would certainly not be taking positions betting on the fact the volatility is done for the year.

Can I just ask a follow up on that Guy. Are you suggesting that possibility that the Brexit could cause an outbreak of volatility?

No, but that's clearly on the calendar. There's a few things: I think it will be interesting to see how the pressures which come from the immigration wave in Europe for instance is another source of volatility. I doubt we're done with volatility in Asia as well, there's still divergence in the US between market expectations and what the Fed says they're going to do, and then there'll be other stuff which we don't know about yet.

Mr Debelle, Mark Mulligan from the Fin Review. You talked earlier about confidence in markets and confidence particularly in Forex markets after a number of scandals, what you're doing here with the guidelines will that be sufficient to help restore some of that? And given that it is a global market and we have disparate national jurisdictions, how do you go some way towards knitting all those together to increase enforcement, let's say?

We're not in the enforcing business, we're in the adherence business. The various securities regulators are in the enforcement business and I can't speak as to what they might do with this. But as I said earlier, this is a global code, it's one code for the globe and for all the market participants. So we're mindful of that and have a fairly good idea about how things are enforced differently in different jurisdictions. We have all of the jurisdictions represented on our group, so I think we're as informed as we're going to be on that. So you know we're mindful of the constraints we have to operate in there, but doing our best.

In terms of the local market, as I said through the membership of the Australian FXC, at least some leadership from the members of those institutions which are there in terms of adherence to the code and I would expect, rather than hope actually, a broader participation across the market, across the local market. As I said, the contribution we've had from the discussions we've had with market participants here, and there was extensive feedback, provided on the earlier iteration. As I said we've got two Australians represented on the global group and Hugh in particular has devoted a lot of time and plane travel to generate the sort of material we've got today. I think the other thing which is worth mentioning is that I think the FX industry as a whole, at least this is what they tell me, and maybe they would tell me this, is very supportive of what we're doing. They've actually recognised a need for something like this to provide clarity for everyone across the industry and also one point of clarity rather than what was there previously. They're not all that different but there were different codes in different jurisdictions. As you've said, this is a global market, makes sense to have one global code and the general attitude of people in the market is this is very much welcomed and that's reflected in the support we've had from market participants in the process over the past year or so in generating what we've got. So I think that gives me some confidence that there's likely to be good adherence to this, and the market is behind and working with us in this initiative rather than it just being a more one-sided endeavour. So the fact that it's a co-operative endeavour I think, takes us to a place where everyone wants it to be, rather than one group having to drag the other one kicking and screaming to that point.

Sorry Guy, Craig Betts from Westpac. Just wanted to ask you what your vision is of how market participants might interact with each other if they observe behaviour that they believes inconsistent with the Code? So what would a market participant do if they were you know sort of into something they felt didn't adhere to the Code?

That's a good question. I think it's probably worthwhile to bring it to someone's attention. Who that someone is, I might have to get back to you on. One thing which we're aiming for, we're putting this out there so everyone has a common reference point, so that everyone should be able to have a clearer understanding of what is, and is not acceptable, and that works on both sides of the market. This is not just the sell side saying this is how we would like the market to run, it's also the buy side saying this is how we think the market needs to operate effectively. And given that, one thing we are looking for is some sort of market discipline, which is sort of coming to your point, which arguably could have been there in the past, but doesn't seem to have been. And so one of those things is we've got to find some way of how that market discipline can actually be articulated and put into practice. So as I said, if everyone's got a common reference point, I think that makes that sort of conversation a bit easier than it was in the past. So it also, for instance, would allow a sell side participant to push back on if a buy side firm comes to them with a particular order and a particular way they want that executed which is inconsistent with the code, and allow the sell side firm to say no, without any risk of that necessarily harming that customer relationship, because with any luck all the competitors would also say no to the same question. So I think the fact that there's that slightly more common set of, I don't want to say rules of the game in the sense that they're not rules, but principles of the game out there would hopefully make those sort of conversations in pushing back on inappropriate behaviour a bit easier than was the case in the past.

I guess just to follow up, actually seeing the question through the electronic that it hasn't been picked up. But as an example, the Banker's Oath has a public register of people who've signed up to that Oath and anyone can go on and see who's had their input and signed up to that. Would you be thinking about a public register for market participants who've signed up to the Code?

Yes as I said we'll have more to say on this in May, that may well be one of the things we're going to have to say. So for instance, in the local context for instance, I would hopefully expect that the members of the AFXC at least would have signed up to this, but also given that, we can't have everyone be a member at the same time. We'd potentially look to have something on the website: these are the institutions in the local market which have signed up to it, so that is very much something which we're considering at the moment. And as I said, by May, probably will have articulated something like that.

We have one more question and then I think we're going to have wrap up and move on, one last.

Paul Cottee from NASDAQ. You mentioned that this is a global code rather than a set of rules, and that rules are more the problems of the individual regulators, does that not however still allow for some level of regulatory arbitrage if ASIC interprets something differently from the FCA, could there not be gaps there and you know how would it translate across from one jurisdiction?

So I can't speak much about how individual regulators will either both use this and/or interpret it. What I would say is that if we're putting it out there, so different regulators may take this to a higher level in different jurisdictions, and I don't want to say that we're putting out minimum standards, because that doesn't sound like a very lofty ideal, but we're putting out this common set of standards, I think it's a fair way above the minimum, which you would expect all market participants to be following. If different regulators want to take them to different levels above that, that's obviously their own prerogative. I don't think there would be a sense in that people will interpret them differently in a way that will allow arbitrage. I think it will be more just the different degrees of vigour with which they utilise this. So I can't commit regulators, or I can't say what they're likely to do clearly, but I think we're putting out this common set of standards, how people take them above and beyond that may vary across the globe, but I don't see that evolving in a way which would be problematic. I think what we've got is something which takes the market to a much better place, and a place where we want it to be. If there's some degree of variation above and beyond that I don't see that it's creating any harm.

Thank you so much Guy Debelle.