Transcript of Question & Answer Session Panel Participation at the Sibos 2018 Conference

Hello, everyone. My name's Colin Lambert, I'm Managing Editor of Profit & Loss Magazine, and welcome to the FX Panel at SIBOS this year. We are that red-headed step-child, at least we're not on the last afternoon I suppose, when everyone's in the pub. But, what we're going to be talking about today is a very important development in foreign exchange, over the last couple of years. The FX Global Code, we'll go into some of the reasons why we need it and so on. Just to remind everyone that Slido is in operation so please make sure you've got the app open on your phone, or you can do it on the Slido website. The address is right there, on your screens. If you want to ask a question at any time, the wonders of modern technology, I've just been listening to Quantum Computing upstairs, this is probably slightly short of that but, we can see the question on the iPad and as long as it's not libellous or slanderous, we'll ask it. We're an FX panel so guess what? We might even ask the libellous and slanderous ones.

I also have, the latest toy, this is a microphone. So, if you want to ask, do it the old fashioned way, and put your hand up and ask a question, we'll throw you the microphone. Or we do have people walking around who can actually hand you a conventional microphone. Obviously, if you're spending too much time on your phone, I did used to play cricket at quite a high level. So, with me is Guy Debelle, Deputy Governor of Reserve Bank of Australia. If I was going to insult Guy, I could call him the grandfather of the code, because Guy chaired the committee that developed the FX Global Code and brought it to fruition before stepping down, this time last year … 18 months ago, something like that. And Fred DiCicco from Bank of New York Mellon, and Fred is more in the world, I suspect some of you guys are in, correspondent banking. He's Global Head of Treasury Services at Bank of New York Mellon.

We're basically going to look at the top-level themes of the code. Then try and look at some of the impact on, not only, correspondent banking but actually your services providers. You know the, fintech guys and the programmers and coders. So, I think what we'll do, we'll set the scene Guy. Why was the code needed and how was it created?

Well, the reason why it was needed was, the FX industry had a bit of an issue, which had surfaced. It was five or six years ago now, something like that. Where, initially around the fix, the London 4 PM fix, or generally around any number of ways of, mostly banks, mistreating their customers. They were suffering a large, reputational issue which had actually got to the point, that those issues that surfaced, there'd been prosecutions on the back of them, particularly around the fix. That started to have a detrimental impact on market functioning, which was very evident. Something needed to be done to try and improve that market functioning and address the reputational issues that the industry was suffering from. We, the central banks, could see that first hand because we were in the market everyday ourselves, it was very obvious to see that increased dysfunction in the market, plus we care about the exchange rate because it's an important part of monetary policy transmission.

So the code was needed to, for a number of reasons. One, to address that reputational issue but you wouldn't just do it for that. The other one was, that there were some areas where there was just no common understanding as to what constituted good practice. You could say that practice needed to improve but it was useful, it was extremely useful, to get out there something which actually said "This is what we think constitutes good practice." So that there'd be an agreed standard on that. There had been codes of conduct in all of the major FX centres for a number of years, clearly they hadn't been followed. We needed to come up with a way also of getting people to follow it and then also the fact that the market is a global market rather than – more than almost any other market, very much pushed for the idea of a global standard rather than one which is particular to each jurisdiction. Hence, we have one code to rule them all which is this thing. Mostly it exists in an electronic form – this is one of the few hard copies around.

If you can find an unsigned one of those, it's worth a fortune.

Yeah, but the important point is, there is one for the whole global FX market.

I guess then that it's a question of the fact that this is foreign exchange. I mean foreign exchange historically has been a self-regulated market and this actually attempts to avoid it becoming an overly regulated market.

Yeah, I always balk slightly at the self-regulated bit, in the sense that most of the participating institutions in the FX market, not all, but most are regulated in some form or another. To some extent that was why they ended up being fined so much, because there was some degree of regulation over them. So, there is some but not particularly on FX business. So, they're regulated entities participating in the market which had less regulation than others, that's true. And, I think the other point from my side of things is, the FX market is not an exchange traded market. I think there was a serious risk of exchange-type regulation being foisted on it, in a way which would absolutely be to the detriment of the market functioning and so I think it's, at least in part, an attempt to say this is an appropriate way to regulate … well this is not regulation but to impose appropriate standards of conduct and behaviour on the market, without turning it into an exchange traded market.

Give people a framework within which they can actually act with a degree of confidence?

Yep.

Yeah. So, I guess how do you summarise the key tenets of the code? I mean there's six basic principles behind it isn't there? I mean, can you outline those for everybody?

So, most of the stuff, I think, is common sense, which is true of nearly all codes of conduct. So, I wouldn't describe it as much … it's more, it is a bit more than common sense. As I said there are some areas where there are grey areas, people had different views. We tried to come up with something which everyone could agree on what constituted good practice. On that, one important point which is worth making is, this is not … so while most of the malpractice, at least to date, we know about was on, basically on the sell side. This is not a code of conduct for the sell side. Nor was it developed by the sell side. This code of conduct was developed, we as central banks worked directly on it but alongside us were there, it was a joint public-private exercise. On the private side there was the sell side but there was also the buy side, platforms, corporates, so right across the full spectrum of the market.

It is something which we were able to get agreement on across all segments of the market, so it wasn't, the sell side stuffed up, they're going to write the code of conduct to say how they should behave. No, that wasn't the way it was. As I said, just going back to what it is, it's 55 principles. They're all written, in pretty straightforward English. They're easily understood both by your average FX trader which is a fairly low bar … [Laughs]

Thank you! [Laughs]

And obviously also by people from the back office which is a much higher … [Laughter]. It's understandable I think, from people who, regardless of your degree of participation in the market I think, should be, fairly understandable.

The other thing which the code has, is that in addition to those principles, a large chunk of which I would say constitute common sense. One part of that common sense is actually treat your counterparty well, rather than rip them off. That's a theme which underpins a lot of it. But, the other thing we've done, we've put a whole bunch of examples in there to actually illustrate what we mean by a number of the principles. So, it's practical examples, if you're in this situation, what do you do?

Fred, what's your observation on embedding principles in to a business?

Yeah, thanks Colin. I don't know if I need to preface my answer by saying, I'm not an FX trader, so. [Laughs]

You're intended answer, we'll make sure people know that, yeah.

So, I mean its critically important, I couldn't agree more with the comments that Guy alluded to. None of us in the room are ignorant to the headlines that have impacted the banking segment over the last few years. Whether it's not only in the FX market, whether it's interest rate manipulation, whether it's mortgage lending. You know, instilling standards to ensure the integrity and confidence, the integrity of the market, the confidence of the participants. I think, is absolutely critical. What we have done, to some of the other points that Guy had raised, we focused on mitigating market manipulation risk in our processes in our FX operation. To the point, where we have required training with our staff, our FX traders and back office staff, including attestation of the code as well as acceptable pre-hedging practises. Just as an example of how serious we're taking it and the importance that we see, of the code in the market.

I guess it's also important Guy to sort of say, this is a work in progress. I remember you, when you were launching, you said you want it to be a living, breathing document. And that there's still work ongoing now, different work streams. Some of the streams are very technical but others are just generally around the level of disclosure and things like that, doing the right thing.

Yeah. So, I mean, a couple of things on that. One, the FX industry continues to be in constant change, so some language is relevant two years ago now when we first put this out. Some parts of that have moved on since then, structure of the industry has changed, continues to change. We've got to make sure that remains current to that. But at the same time we can't be re-writing the thing holus bolus every couple of years. That's going to defeat the purpose too. So, it is evolutionary as you said and there are particular issues which are, sort of, hot button issues in the market at a particular time. The Global FXC goes out in seeks market views on that and then distils that and embeds that in the code. The first example of that was around Last Look, which was, and still is, a reasonably, a pretty contentious issue in the industry. So to try and distil that down to something which is meaningful but something which is acceptable to the bulk of market participants.

I suppose one thing which I think is important is, people often say "Well, codes of conduct are not worth much more than the paper they're written on." Well they're in electronic form, they've got no paper they're written on, so they're worthless. So, it's important, this comes from something you've just said, is that it's important to make sure that it's not just, lets people go and just pay lip service to it. There are a number of mechanisms by which that's achieved. One is that businesses actually have to sign up and attest to the code. It's a fairly straightforward attestation. Sorry the signing of that is straightforward. What that does mean is you have to be able to demonstrate, if asked by either your counterparty or by your local regulator, what are the processes you've put in place that are consistent with the code. So, there is a fair amount of market discipline I think.

One of the things, one of the potentially good consequences that came from all the scandals is that I would say, that there have been not a lot of market discipline prior to that. FX for some of the larger participants in the market, particularly on the buy side was more a secondary business. So, if nothing else, the prevalence of those scandals and the consequences of them are a lot more front and centre, gained a lot more visibility, so there is more market discipline. The other thing, also in a number of jurisdictions including the one here and also in the UK, is that the local securities regulators use that as part of their market oversight and the FCA is part of the Senior Managers Regime. Here ASIC uses it as its reference point, into oversight of the FX market here. And that's true, I think, in Hong Kong and Singapore at least as well.

So Guy, I'd add to that, in terms of the practicality or adoption of the code. In some ways in the US, the US banks or banks operating in the US, had a taste of it, you can argue with the introduction of the Dodd Frank Act, in response to the Financial Crisis. At that time, it was non-specific to FX it was really more around disclosure, ensuring that you're properly exposing rate to consumers of payment services. To Guy's point, around balancing the acceptance of the code, one thing I think we learned from that, is you get to a point of diminishing return on a regulation being too heavy handed, and then starting to have to peel back the layers of the onion to find the balance where the industry is going to …

Which is exactly what they're doing with the Dodd Frank. We're going to wake you guys up now because I think we've got a Slido question ready to go. So, you can get the app open or get on the website. Guy mentioned the Statement of Commitment there so, here's a question for you, you'll have about 12 seconds to vote on it I believe and there'll be some very dramatic music while people do. Should your institution commit to the FX Global Code? We thought we'd make it trickier than yesterday, I saw yesterday I think it was three answers, we'll give you five to have a think about. But, yep, if you're ready to go, please vote.

I can add one to the top part, because we've issued a Statement of Commitment.

I guess, the interesting thing for me from that is, you question I guess, the 6% "No, until it becomes mandatory." But the plans to in the future, how do we get people … how do we continue the outreach of the code?

By events like this, in all honesty. I think it's interesting the Global FXC, which has oversight of all of this which is both central banks and the private sector, the FX industry has been trying to monitor how much outreach they get. On the sell side, the outreach is pretty much total, near enough, about as much as you would expect. On the platform side, again I would say, it's large. On the buy side, I think is where it's particularly mixed and some of it is some combination of "Don't know." And "No, we do little FX business." The last one's sort of fine, in the sense that, one of the things we got to great pains to stress in the code is, it's the proportionality. So, if you're a buy-side firm, who doesn't transact directly in the market, a lot of the stuff is not going to be relevant for you. If you're involved in another part, if you're purely in the settlements business, well only the settlements part of the business of it is going to be relevant for you and the rest of is just there, as much for your information.

One thing, I was particularly trying to stress, when talking to the corporates about it, is if you've only got reasonably irregular interaction with the market. What I think, they think, the code is most useful for, is what, as a standard behaviour you should be expecting from whoever's doing your FX execution for you. I wouldn't expect you to sign the code. If, on the other hand, you're a large buy-side firm and you've got your own FX trading desk. My expectation on you, is no different than it is around a sell side bank. So, it's very much dependent on the degree of your participation in the market but if you are, as I said, more on the receiving end, then I think it's very much a question of giving you an idea about how you should expect to be treated in the market. The other thing it does provide you is, these are the sort of things you shouldn't ask your counterparty to do on your behalf as well.

Can I just add … I think another way of considering adoption of the code or enforcement of the code is, what we expect of our counterparties. We responded to the GFX Survey, saying we expect our counterparties to sign the code. We have not made it compulsory and we are starting to deal with counterparties on a case-by-case basis that have not signed. Now, whether we make it compulsory or whether all institutions make it compulsory is to be determined but, clearly another consideration of how the market wants to force, or the industry wants to force the market to adopt, in my opinion.

Yeah, I mean an interesting question around that, is actually in terms of a platform. So, if you've got platforms, a number of them signed up to the code and then you've got people operating on your platform, who you're not confident on their behaviour, that's an interesting question.

Well because a lot of platforms hide behind the fact, we've got platform rules. But, those platforms, have they actually checked whether their platform rules, actually do adhere to the guidelines in the Global Code. I guess, it's to Guy's point about proportionality. You work your way through your business working out exactly which of these principles relates to your business.

I believe it's going to be broadcast tomorrow morning, it's clearly going to be the highlight of SIBOS, but, I did a TV interview earlier today. I've got Keith Sedergreen, I'm going to throw things out now, before it gets dangerous. Keith can you give us a few thoughts as we did last time, on talking to the ACI. In terms of, the outreach program, how do you think it works? Also, what we can do to keep momentum for the code up.

Well, I think that Fred made a good point there, where it's top down really. It's the banks that've signed to the code, basically the waterfall effect where they only deal with people that've signed the statement of commitment. Okay, on a case-by-case basis but why haven't you signed it, when it's to your benefit, with all the transparency that goes with it. There again it goes down to the next level, where maybe people dealing with any sort of service provider, asked about their statement of commitment. Have they signed it? Do they know about the FX Global Code? Because, I think the transparency aspect can add to the bottom line because the service is going to be that much better.

So you think, more people asking more questions about …

Yeah …

I guess the challenge is, what happens if they don't like the answer? What do we do then? Fred, for instance, if somebody turned around to you and said "Right, no we actually haven't signed the Global Code of Conduct because we don't think we need to."

I think there are a lot of other parts to that question that have to be considered. Certainly, for banks, relationships with the counterparty, the level of business we're doing with that counterparty beyond FX. How disruptive do we want to be for that relationship in enforcing the code if there is a relatively high degree, based on past experience, of them conducting themselves properly in trading with us. But I think, I don't know if I have an absolute answer to that question, but I think it's something to take away for consideration on how to do that.

The central banks did say when the code was first launched that they wouldn't transact with non-signatories, except for in certain circumstances.

No, well …

Is that a get out of jail free card?

No, we don't transact with … So now we do require all of our counterparties to sign the code. The get out of jail card is, this is nothing which is likely to happen in the foreseeable future in Australia, but if we're in the world of FX intervention … So we did, ten years ago, the last time we were intervening in the FX market, we're not going to stop in the middle of our own FX intervention and say, "Well, we're not sure if this person who just hit us has signed the code," and not going through with the transaction. So that's the get out in those sorts of circumstances, where we've got other considerations at the top of mind, we're not going to be busy verifying that every person on the other side of the market has signed the code. But in our regular business, as of today, all of our counterparties have signed up to the code. And we won't deal with ones who haven't.

Okay. Just want to go back to you, Keith, Guy mentioned corporates, you raised an interesting point with me the other day about how corporates, why it's important that corporates sign the code in terms of their operations and the governance.

I just think, again, the standard of transparency in the way they're treated. Guy mentioned it earlier. It's the way that they're treated. It may be, they might look at FX as more transparent and clear and it will help their bottom line, because they know what to expect from their service provider and/or bank. I think a greater understanding at that corporate treasurer's level should help the market as well.

It's sort of about getting the word out there.

Mm …

From your perspective, Fred, has there actually been any discernible impact on the code for someone in the correspondent banking world at this moment?

I would say, not directly. Again, from the correspondent banking perspective, and I guess how I would define correspondent banking for the purpose of this discussion is really the FX trade to cross border payments or commercial payments. From our perspective, they remain really two separate and distinct activities. On the one hand, when we're providing payment services to a client that they want to make US dollars cross border to another destination, they're obviously interested in just getting a good rate. But, the settlement of that is separate and distinct of then, what we have to do, what our markets team has to do, to actually cover that position at our various Nostro accounts. From that perspective, I would have to argue that there has not been a direct impact to the correspondent banking business.

Two things I would point out, I think, maybe for consideration, is there have been an adoption of some FX payment practises over the last few years around so called auto conversion or selecting your preferred correspondent to convert on your behalf without an implicit instruction from the ordering customer. In my opinion, the code talks to that type of practise and whether it is something that the industry should either put into a code or a policy or govern in a different way.

I've actually got a couple questions from the floor while we're on the adherence piece. I guess, we'll go to you Guy on this. Who would be the judge if you ignore the code that you committed to? And a separate question, what types of incentives and monitoring of institutions to attest the code are out there or available?

On the first one, I don't know who the judge was who heard the cases around the fix, but that would be the judge. I say that in jest but also in all seriousness, it's like, good luck with your defence if in ten years' time it turns out that you've been, said, "Yeah, we knew the code was out there, we just chose to ignore it." I can see that going down well in a court of law,, particularly with the press and the stories out there. So to some extent, the answer to the question is in fact, that's the judge, it's literally the real judge. Recent history would suggest that there's some chance of that happening. To the extent ignorance was used as a defence in some of those cases, I suppose to the point, it is not a defence anymore. It will be wilful neglect this time around, which I think is probably going to put you in an even worse place than ignorance to the extent that that was true even in the first place.

The other judge I think, I've made this point a few times, including I think in conversations with you, is that the other judge to some extent now, more plausibly, is your customer or your counterparty. Without painting too dark a picture of the way the industry used to be, if you were getting ripped off by one counterparty going back a few years, you said, "I'm going to take my business down the road to someone else." That wasn't a particularly credible threat because there's a fair chance you're going to get ripped off pretty much the same degree by them. Whereas now, I think that is a credible threat. You can say, "Well, if you're not going to treat me well, I'll take my business to someone who will." And I think there is actually a more … so, that to some extent is the other judge.

Around the adherence to the code, we can't use the word enforceability because it's not, as Mr Potter, if he were here, would remind us, it is not regulation, he would have said that at least ten times by now. And it isn't, but I mentioned a couple of things earlier. It depends on the jurisdiction you're in, but in this jurisdiction, ASIC is using it in its surveillance of FX market activities, which they're sort of out and about conducting right at the moment. In the UK, the FCA has recognised, effectively as part of the Senior Manager's Regime. That gives a fair amount of oomph behind it.

The other, as mentioned earlier, that the central banks will only deal with people who've signed up to the code. I'm not kidding myself as to the value of our FX business, because it's not that large, but there is some reputational effect if we threw you off our counterparty panel, because you wouldn't sign up to the code.

And it would be a different matter, with all due respect to the RBA, or due disrespect, whichever way people will take this, it would be a different matter if it was BlackRock saying that.

Yeah, absolutely.

Because they'll only deal with billions of dollars every day.

I do think that some part of it comes from the way the market takes it as well. One thing, which I think would be particularly interesting would be if the platforms headed down that route, because that would actually give it quite a bit of oomph. Just on the visibility on that, and I know it's not necessarily, exactly as good as it can be, but the information as to who's signed up to the code is out there. If you go to the Global FXC site, there's a page which has got registries on it. And from there, you can see who has signed up to the code on the various registries that are out there.

Do you think we need more detail around that? Because, for instance, I don't even know if you know the answer to this, Fred, but Bank of New York Mellon are a signatory to the Global Code. Does that actually cover the correspondent banking business or the payments business? Or, is it an umbrella signatory? Because, I know a lot of the institutions that signed up for their FX and local markets business.

I would say, we signed it only in the context of our FX trading business. Again, we know with our focus particularly on trying to mitigate manipulation risk, enforcing standards and practises amongst the FX staff. I would say it does not blanket over to the payment business.

That varies institution by institution. There are some, I might get this wrong, but I think it's true, I think Citi basically has signed up on behalf of their global business.

I'm not sure if it is them, but I'm not sure about their PB.

Yeah.

I'm not sure.

Yeah. But, it does vary institution by institution and it does generally make it clear what part of the business it's actually covering, mostly because it's got someone's name with their title on it.

Our attestation is global in nature in terms of all of our trading desks globally, but it is limited to our markets activity not to our …

Does your interaction now then become a situation whereby you need to understand the code and its impact on the FX business so that you can actually monitor the service you're getting from your internal providers?

I would say, absolutely yes. Again, because we rely on those internal … both internal service providers and correspondent banks that we select to be the last leg of a payment transaction for us are critically important, for the quality of service we deliver to our clients. In that respect, we do need to be involved and we do need to understand the implications thereof.

Certainly, are all 55 tenets of the code relevant? Absolutely not. But, things around pricing disclosures, avoiding things around Last Look to manipulate price and things of that nature are the ones that would rise to the top for us in the payment space.

There's like 54 percent of you haven't signed the statement of commitment, maybe at least read the code and then you might start asking questions of the people in your FX business. It might make for a few tricky conversations. I wanted to sort of cover something that this conference, the full story in particular is there's a lot of fintech out there. There's a lot of innovative ideas. How does the code treat innovation? Because, as you said, the industry's always, the Foreign Exchange Market is always evolving. Technology is evolving faster. I would actually argue, one of the reasons why we needed the code is because literally the technology outstripped our ability to actually survey what traders were doing. How does the code approach sort of the technology world?

We certainly acknowledge it exists, so that's a start. No, which is …

A few year ago.

A few years ago, it wouldn't have been true. There's a section there on algos, the always useful phrase about don't let your algo loose on the market, if you don't know what it's actually going do to it. You know, try and avoid disruptive algos, but also to have appropriate risk management around that, including the appropriate kill switches, for example. It's very much in the sort of risk management space, in terms of being able to manage your technology so that it's not having a disruptive impact on the market. It doesn't go down the route of the SEC and provide your algo for a clean bill of health before you use it. It's not that, as I said, this is about principles, not about regulation. But, it is very much about, you should be able to demonstrate the sort of testing or whatever that you've done around your algos before you're letting them loose out there.

But also, we're sitting here with one of the largest non-bank providers around these days, which again, wouldn't have been something we would have been concerned about even a decade ago, really. But, that's a technology business. I think that's fair to say. Most of the sell side, and FX is really a technology business these days, there's not many people left in FX these days. It's mostly machines.

There's a lot of people coding the machines.

For better or worse. The code has got to very much acknowledge that it's not necessarily about someone picking up the phone and doing the deal with the counterparty. It's sort of the platform on which you're executing the validity of the price. Last Look is a technology issue. It's not a people issue, fundamentally.

On the subject of algos, the first place I'd want to go and get my algo checked is a government agency, that would perfect. Chris Knight works for XTX Markets, as Guy said, it's one of the biggest non-bank players that, frankly, five years ago, most people would not have actually heard of. What do you see the challenges around the regulation of the code and making sure that the people actually developing the algos and the code is the programmers?

Yeah, that's right. I don't consider it just about the algos. All the principles still apply to XTX. We need to treat our clients fairly via software. We don't have any traders. It's a 100% electronic firm.

A trading firm with no traders.

A trading firm with no traders.

That is the modern world, ladies and gentlemen.

105 staff. Our software needs to treat clients fairly, transparently and follow the same principles that a traditional bank with manual traders would need to follow. That comes through software audits, proper governance, all the same sort of similar sort of controls as a voice business. In one way, it's almost not different, except it can be very, very, very fast. Software can steal money from somebody without them even seeing it. It's super quick. You need those audits of software in place and I would say here, for the people that haven't signed the code, and I know it's more than 50%, if you work for a technology company that provides execution software or settlements confirmation, the code does apply to you. Unless you've written the code, a developer might have inadvertently written a line that doesn't treat your client fairly. You do need controls in place. On top of those sorts of software audits, we also have independent software for market surveillance that will observe to make sure we're following the global code and ECM and exchange rules.

Let me ask you a question then. If you see something happen, to Guy's point about the platform is watching what's going on, if you see something on a public platform that you don't like or you're suspicious of, is that something you now, as a matter of routine, escalate to the platform?

Yes, we do. Interesting, when I started two and a half years ago, I was in London and all the developers, or the quants were freaking out about something happening in Russia and it was quite a small spoof, $20 million and I was wondering why they were getting so excited about it.

Just $20 million bucks.

$20 million of volume, not of theft. Their view was, they were excited because it was a new type of spoof that they hadn't seen before. But, their view was that if they didn't report it, that somebody was just testing something out and they'd industrialise it if they got away with it. So, we take it as our duty to report these things.

I think one thing which is basically I think what Chris is saying, I would say the code is pretty much technology agnostic. As you say, it's mostly a question of speed, but the fundamental principle doesn't matter too much whether it's a person doing it or it's a machine doing it. It's just effectively one of speed, but the principle at the heart of it is still pretty much the same.

I was just going to add to that, Colin, in my opinion, to Guy's point, fintech is an enabler and a facilitator of the transaction. It really doesn't change the underlying practise of FX trading or payment.

I accept that. I guess it comes down to this, there's a culture of challenge to my view, in the code. If you see something, say something. But, I think it's, to me, I look at it and think there's, if you want to sort of know how serious this gets, there's one FX trader been sentenced to jail in the US who actually lives in the UK, that's a culture shock to him. There's three FX traders currently on trial in New York facing a similar thing. To the fintech issue, there's a guy called Gitesh Thakur who runs a software company in Chicago. And he actually delivered a piece of software to a trader who became known as The Hound of Hounslow who spoofed futures markets and made about $40 million. The person that actually provided the technology is now on trial for doing so. Is there an obligation there on the part of you as a service taker to actually turn around and say, "Well, if there's something wrong here, I've got to escalate it because that guy …’

Absolutely, yeah.

Will be complicit in that.

In that regard, I would have to agree with you wholeheartedly.

So the fintechs out there, maybe need to … Because, it's a question of responsibility, isn't it Guy? There's a question actually on here, someone said, "Is the signature on behalf of the company or individual?"

There's someone's name on it, but it's name, company.

It's signed on behalf of the company.

Yeah. But, one of the things is the accountability goes up. So, there's someone's name on it, the accountability, always keep in mind the concept of proportionality, but if your fundamental business is an FX business, one of the things we say, there's someone's name on it, but the accountability goes right through the executive of the company. And again, if you're coming, at least in the UK with the senior manager's regime, the accountability is very … that's sort of why I hesitate. Because, there, the accountability is both individual and corporate. It's not one or other.

Is there a problem though, Chris, that you actually need to make sure, to Guy's point, yes, the responsibility goes upwards. But you've actually got to make sure the responsibility goes downwards so the coders who are programming it actually understand what they can and can't do under the Global Code.

Yeah. I don't know how far actually, an e-learning process or something would go at a bank, but we've only got a 105 staff and I'm pretty sure all of them would have had to do some e-learning on the code, which includes those developers. Honestly, it's really easy to inadvertently write some code that can treat the clients incorrectly.

And is there a problem, then Fred, that actually then you're buying some software from a fintech firm, you've got to make sure the people who are going to assess that software are aware of what their responsibilities are …

Absolutely, so that gets into a whole other aspect of vendor management, vendor risk management from our perspective, right. So, we're ensuring that we're doing the right due diligence to ensure that we know what we're buying. Not only before the fact, after we implement, put in the right risk and governance controls to monitor throughout the process on that platform.

So to the point, principle 5 is where you'll find it, is very much about going down as well. You, the signatory to the code have got to be able to demonstrate you have been able to … For those people in your business who have that interaction with the market of the FX market that they're fully aware and understand the FX code, either by some sort of E-learning facility, by our friends at ACI or the like, or whatever. But you've got to be able to demonstrate that it's understood down through the organisation to at least the parts which have that interaction with the market.

And for whatever attestation is worth in terms of ensuring that staff do that, and we adopted that practise of not only educating the staff on the code, but having them attest that they understand the code.

And continue to attest I assume?

And then continuing and following up attestations.

Yeah, at the RBA it's an annual process.

Yeah.

Yeah. That's the thing, to your point, earlier technology moves on. I mean, quite a few people in this room might be familiar with the issues around settlement. We've got CLS, we have a CLS window. But, there is a move out there to sort of try and move some of this stuff onto like distributed ledger technology, using tokens, there's guys talking to me about atomic settlement. It all sounds very sexy. I think basically it does the same thing. So is part of your challenge going forward, then Fred actually keeping up with these new technologies as they come in and trying to actually marry them to …

Yeah. I can't speak specifically to our FX operations, because I'm not part of that. But, just firm-wide, you know, things like distributed ledger technology, blockchain, adoption of cryptocurrency. Where it may be applicable, is all incredibly relevant for us. How much of it we're actually adopting and employing at the end of the day is still a big question mark. But, you have to stay up with the times as they say.

There's enough people out there who insist on telling you that blockchain is the solution looking for a problem. Actually, I think what we'll do. Actually, we've got a Slido Two if we may please, everyone, so we can have more dramatic music. I think it's around DLT, but if you want to, you actually use … I mean, you know. Here's one for the settlement people in the room. I'm not sure I know the answer for me, vote away, people, please. [Music plays]

So, we have some technology evangelists in the room. That's nice to see. Still moving. I guess the good news from that, is that people are very comfortable. If we broaden that out to technology generally if people are very comfortable with adopting fintech then they must hopefully be comfortable that they can align it with the principles of something like the Global Code.

Yeah. Yeah, I think that's right. This settlement one is interesting. Again, I don't think that the technology actually matters that much in terms of what the … For settlement almost more than anything else, I think. What are you trying to achieve with settlement? The general principle remains the same, regardless of the technology, pretty much, that's actually used to do the settlement. So, I think that's so much easier than some other aspects. If you think about more on the front office side, on the execution side, the issues around flash crashes including the sterling one that happened. That's a slightly more - there was a discernible difference between that being done by a machine, and what you could've achieved as a human in that timeframe. Slow - speed matters and stuff like that, in a way which is not quite so much of an issue with settlement.

Do you think it would be helpful to explain to people there are several registers where people can put their statement of commitment, to the Global Code. Do you think actually it would be … for instance, one I'd heard of really, relatively recently, was the European Association of Corporate Treasurers; have a register just for corporate treasurers. Do you think it would actually be helpful for the industry if we actually developed a register for technology providers; like a fintech register? That could then be brought into the main register …

Potentially. Yeah, that's fine. Part of the point was, we were fairly agnostic on that. On who should provide registries; and there are quite different variants on that. CLS has one, for instance. In Australia, AFMA runs it here. Part of the point about having the GFXC didn't want to get into the business of registry provision as much. So we just weren't quite sure we had the resources to be able to do it, and others did. But it does at least provide a registry of registries. So that it at least provides a one-stop-shop, which I think is searchable. Where you can actually go to – up to a point, or it's supposed to be at some point, where you can go, and then go from there, and there's a sorting mechanism by … sort of … part of the industry that's probably helpful for people, yeah.

So, same question, I guess, on correspondent banking and people in the payments business. Given Guy's point about the proportionality would it be helpful in your world if actually you could say, "Well, actually, let's have it. Let's have a register for these, even a statement of commitment, from correspondent banking and payments divisions. So at least you know they're aware of the code.

Yeah. Absolutely. Not to promote our host here, to me Swift has a network effect in the banking industry for correspondent banks. And, I can see them being a platform for a global registry for correspondents in this space.

I guess at some stage, then we ask the question does Swift sign a statement?

Yeah.

If they're going into FX business.

Exactly.

Well that's the thing, I guess … How does it sit with Swift as does CLS, they do meet the other standards for critical market infrastructure.

Yep.

Does that kind of negate the need for them to sign the commitment? Because they are two different things aren't they?

Yeah. CLS has signed the code obviously …

Yeah. They had to, their CEO was the Chair.

So yes, but, again it probably comes from the nature of the interaction. We were keen to get a fair chunk of the core infrastructure of the market signed up so amongst other things people could have confidence. So again, not all the code - not much of the code, actually applies to CLS. But, in the parts which do people probably really wanted to know they can have confidence in that part of the market. Now, yes, they have those other forms of validation because they are critical market the infrastructure. So that gives you other degrees of comfort. But at least, looking at it purely through this lens, which is not necessarily the same lens that some of those other regulators would look at it through.

So, I've got a question here, Fred. You're going to have to help me on this one, because I don't understand it.

Put me on the spot now.

Old spot trader - should the code cover recommended payment type? I understand that bit. Example being, use of MT202 versus MT103s, which I'm now lost on, and crossover lack of consistency with payment and anti-money laundering best practises.

So I think another way to answer that question, should the code apply separately to commercial payments, versus bank-to-bank.

Okay. Thanks for explaining that to me.

Again, I think it gets back to some of the earlier discussion that we had around the applicability of the code to the payment industry. Again, commercial payments … a sender and receiver funds cross-border their interest is really, are they getting an appropriate rate. Are they being disclosed at a competitive rate. A lot of the other tenets of the code around settlement and the like is probably secondary. On the bank to bank payment space, that is more applicable to the settlement of FX trades. So, if you want to compartmentalise where you want to apply code, it's probably more relevant on the 202 space, than on MT103 space. I'm not sure if there's value in really getting that granular in how the code is applied in the correspondent banking space.

Yep. Very principled space. Other aspects certainly wouldn't get into that level of granularity.

So, again, at high level. It would be, just make sure you're using the appropriate mechanisms and have the right safeguards around …

Should be able to demonstrate that it's fit for purpose, that's part the other point. In coming back to the question you asked earlier, Colin, about the judge. I mean, one of the things … there's a large amount of stuff in the FX industry which is grey. There's some stuff which is white. There's some stuff which is clearly black. There's a fair amount of grey. Part of the point is that you should be able to at least have thought about it ex-ante rather than ex-post. And have a credible explanation as to why you think what you're doing is consistent with the Code. I can't guarantee you that someone in ten years, hence someone will apply some degree of hindsight which will negate that. But, the more you can say, this is how we thought about it, and demonstrate actually this is how we thought about it. These were the sort of things we were thinking about in applying these principles, that's surely got to help.

We're going to have to do this as the foreign exchange panel, we're going to random now. We've clearly got a few overseas travellers in this room. Because the question I've got is, "Will the code be extended to players like Travelex, and the Post Office who charge 0% Commission but add large margins to the FX rates, which they do not disclose. In other words, a bunch of you have been ripped off at the airport on your way here …

Yeah. So what I think we are – we're at great pains to point out, and in part because … This is about wholesale FX, not retail FX. The code refers to wholesale FX, it's not about retail FX. There is actually an inquiry just launched in this country at least into exactly that.

Yes.

But the code is … one of the reasons why the Code is only about wholesale FX, and is explicitly not about retail FX, is because the retail regulation in each jurisdiction around the world varies incredibly.

And that aspect really touches on some parts of the correspondent banking business too, because it is a conduit to settle a lot of retail related payment activity.

Yes. We can't do a panel at SIBOS without talking about AI … they both look nervously at me. Chris? He's an old programmer, so I do want to look at it. I'll actually promote a panel here. I believe tomorrow, or maybe Thursday? And it's Ethics in AI. I think it's upstairs at [00:54:30]. Might be quite worth the visit. But, Chris, from your point of view, what challenges does it represent when you've got a machine learning environment? Because you started off as a coder, and then let it go. How do you marry that with the principles of the code?

I mean XTX is built on machine learning and AI. But, that's mostly for the research. So, a human quant will look at, we build on correlations across markets. The quant will receive correlations from our research machine and it will throw up ideas. It will still have that human interface to approve them and say it makes sense, that there's something real behind the correlation. And then that will be put into the model as an input and, through that process there's so many different safeguards.

I wouldn't say, you know, while we're 100% automated. As Guy pointed out, the Stirling flash crash; I don't personally think that would've happened in a manual trader's world. Not at that speed, and … 60% or whatever, of the market moved so quickly, or more. It wouldn't have happened. But, that sort of, just electronic safeguards are not really AI. I think every event like that does make the world a little bit stronger, where everybody … it's good to use those examples in their back testing, and what-if scenarios, and try to build some safeguards around it.

Our machine for instance, in the Stirling flash crash stopped pricing, and said it couldn't compute. And it was up to a human to come back in, and turn it back on.

So, to that point, Guy. Is this where we need the code to go? We need to sort of really get this word out about responsibility? And so, if someone is actually developing something in the AI and machine learning space, within the firm, the best practise would be for them to put their name on that piece of work. So that we can have some responsibility. Because, what worries me is that we sit there and we have a runaway "algo" or we have something go wrong, or we have like a "spoofing’, which is actually illegal in the US. If someone codes it, say, and like "It wasn't me, it was the machine." I started off here, but the machine just went and learned this.

No. We're pretty clear on that. If you're putting it into the market, it is your responsibility. There's no two ways about that.

But, does it need an individual responsibility?

Well you have to have individual responsibility. The head of whatever part of the organisation, which is … if it's the E-Trading business, or whatever. That person who is the head of that organisation is absolutely got the personal responsibility, I think that's really clear.

So be aware of what your people are doing.

Yep.

Absolutely.

I don't know if anyone wants to ask a question the old-fashioned way, will you promise not to throw the catch box too hard if you do? So you've been very good on the Slido. So, I guess we'll close out then. I guess it's … the firms doing enough to adhere the code. Do you expect firms to sort of re-investigate their adherence code on an annual, biennial, constant basis. Or, do you think that leadership has to come from the Global Foreign Exchange Committee by saying, "This is what we've identified."

It's an expectation that you'll re-attest each year. Now, to some extent it's up to you as to what constitutes that. But again, you've got to be able to demonstrate all those things, anytime, someone would ask you, to be able to demonstrate that. And so, again, I would expect that most people would have the relevant staff doing the same, i.e. re-attest. Have the training annually. Re-attest each year. Parts, as we said earlier on, the code is a living document, it's going to change. You've got to make sure – it's not changing in any wholesale fashion but it will change … there are some issues that we are, which are in a state of flux in the market, some issues of servicing, and the code will adapt to reflect them. So, at the very least, your training would need to stay current with that.

And that, I guess, brings me to the final question for you, Fred, will be … This adherence to code imbedded in fintech and surveillance, all costs money. Is there a danger where we end up in an industry where we have the haves and have nots, where it becomes a …

I think that exists today to a certain extent, in the varying degrees of technology budgets that we're all faced with. It's no secret the cost of regulatory oversight, and the imbalance there … whether we end up there? I guess to be determined. I think the code sets a really excellent precedent for the market to follow. And, for banks that are looking to review or reconsider their policies and governance practise in this space, I think it's an excellent starting point.

To the extent that treating a customer well becomes a, returns as a central tenet of banking, that is very much … and people regard that as, actually, a profitable opportunity rather than a cost centre. Then the code, at least, is very much consistent with that.

That's a good positive way to end this. My thanks to you, Guy, and to Fred, to Chris and Keith for joining in. Thanks everyone for listening and your questions from the floor. Have a nice day.

[applause]