NEWSLETTER SOUTH AFRICAN EDITION Your personal member update of what’s happening in the world of Financial Markets. March 2015 ACI launches Online Model Code , Highlights The new 2015 ACI Model Code is ready for release. In it, we not only continue to provide practical guidance on ethical conduct in wholesale financial markets, but ACI launches Model Code Feedback from ACI Congress held in Milan ACI in the press we also provide new guidance on certain areas like “last look”, which is so important to the electronification of markets. Providing Guidance ● ELAC: eLearning and Certification Portal ● Available to all institutions and individuals globally Secondly, we are announcing the ACI Model Code eLearning and Certification ACI WEBSITE UPDATE: Portal, or ELAC, available on-line to our members, to answer the global industry ACI Africa: News and Events call for the licensing regime. While we believe in further education, not further Training Solution providers for the ACI. regulation, we stand ready and able to provide exactly the training so demanded across the FICC markets. We stand prepared to do whatever is necessary to work with the global regulators to provide exactly the licensing regime required. Not only that, we are announcing the ability to make this conduct and trading education available to all institutions and individuals globally, to match the needs of local and international regulators to create a level playing field across markets. We agree with the industry that we must avoid the opportunity for ethical arbitrage across time zones, so that all traders behave consistently ethically, in accordance with established and acceptable global industry norms. Continue reading on p.2... SARB endorses ACI Dealing Certificate. ACI Model Code (continued) Our ACI Model Code, long established as the for our people, and we have been bringing global leader in cross-jurisdictional conduct, the benefits of the ACI Model Code to life for has been written with both the sell side and our members. We answer this need for a the buy-side in mind. The new acronym ELAC testing regime – and we can offer all employ- not only stands for the eLearning and Certifi- ers the ability to prove internally and to their cation Portal, it can also stand for eLearning clients that they have done their best, and Annual Compliance Portal. We are offering received the endorsement of their manage- the chance to have constant updates and ment. annual reminders of your obligation as professionals to maintain the highest standards. Our 2015 Model Code, released in Milan, is ready for inspection. Our ACI Model Code self New ACI Model Code Focus Areas We believe that traders at hedge funds, asset -certification exam is ready for roll out across managers, central banks and other non-bank the financial markets, and our employers will organisations should be subjected to the be encouraged by its availability around the same professional qualifications requirement world. We can self-certify, we can demon- to ensure “a level playing field”. Our Code has strate that ACI membership has tremendous been written with this in mind, and with them value. And courtesy of some technology part- at the table. We are already endorsed by a ners, we can do this on a global scale. Go to number of important industry bodies. our new website and see! Recent events in the markets, such as the We are in command of our own ship, driving change in SNB policy on the Swiss franc cap, the financial markets to re-establish ethical announcements of QE by the ECB, and other conduct and best practice. activity, have led to some challenging trading conditions. While the size of the Swiss franc 2015 will be a very important year for us as Same professional qualifications move is unprecedented in currency market we continue this rapid pace of delivering on requirements for traders at history, it does serve to illustrate the need for our promises, and getting all of the opportuni- various financial institutions. adequate systems, procedures and controls in ties within ACI to come to the surface. Take a the front office, operations and in risk look at what we have accomplished together management. in the past 10 months and over the last 60 Adequate systems, procedures and controls in the front office, operations and risk management. ACI offer dispute resolution and arbitration services 2015 Model Code ready for years. It is amazing. It is the rightful output We recommend that the market participants from our Association with its roots in Paris in refer to The ACI Model Code, which has sec- 1955. Thank you all for listening, and may you tions on a number of issues that have arisen join me in being proud to be a member of ACI recently. David Woolcock will be saying more Financial Markets Association. on this soon. inspection Further, we remind people that the ACI Finan- Certification exam ready for roll cial Markets Association offer dispute resolu- out across financial markets tion and arbitration services that may be engaged and deployed, should these services be required. We at ACI have rigorous training Our ACI Model Code can be found here. “We are here for you” - keeping members informed about relevant local and international developments. 2 MEET David Woolcock: David is the Global Head of Sales & Business Development at Eurobase and also chair of the Committee for Professionalism (CFP), responsible for advising the ACI Executive Board. David is also the Vice-Chair of the FX Committee which in concert with regulators and other FXC’s work to promote a common global, orderly and transparent FX market and to lobby on regulatory issues as required. ACI Global Speech from the ACI President at the ACI World Congress in Milan ACI has grown tremendously since its inception in 1955… our history is deep and varied, and benefits us in many ways. I believe that while our strength is evidenced by the work that takes place at national level, our unity comes from recognising that we are stronger together. Together we form part of the international fabric of the financial markets. Our history of growth and relevance to the markets, and the list of the accomplishments of people that have gone before us, reminds us that we have a duty to help our members, and an obligation to leave the ACI in an even stronger position that when we inherited it. The future of our Association is bright, and we are growing. While we are right to be proud of our past, we must focus on our future. Marshall Bailey, ACI President As leader, and in tandem with the ACI Committees and Boards I attend, I have made strict application of three filters to drive what we do… each decision we take, and each path we forge at International level, must pass by this simple test: 1) Are the decisions we are making, benefitting ACI members internationally? 2) How might the deployment of our membership fees and revenues from education help us to grow, and what returns might we expect for future generations? 3) Are we spending time in areas that each person will benefit from, or just a few, and will each member be able to bring this growth to the benefit of their national, regional and international teams. As we know in sailing, a rising tide can lift all boats. ACI International must help the tide to come in, and bring all of our current and future members the opportunity to be proud of ACI. It has been approximately 10 months only since I was inaugurated at the ACI World Congress in Berlin in late March of 2014. The leaders of ACI Germany put on an amazingly well-organised event. It was at the same time, less than one year ago, that I laid out a vision for ACI Financial Markets Association. The vision is to be recognised as the financial markets association of choice for ethical conduct and best practise, and to provide self-certification in the wholesale financial markets industry. Our three main committees have accomplished a tremendous amount over the years: Just look at the growth of the educational offering of ACI – we now not only have the ACI Dealing Certificate, so coveted around the world, and the Operations Managers Certificate, but a whole series of modules leading to the ACI Diploma. In my travels over the past 10 months, responding to the requests of various national ACI leaders, I have had the pleasure of meeting young men and women who have recently taken our courses. I have attended events in places such as Beirut for the 50th anniversary of ACI Lebanon, the annual congresses of ACI Austria and ACI Czech Republic, and listened to lists of local members congratulate each other as they cross the stage to receive their certificates. Continue reading on p.4... 3 Speech from the ACI President at the ACI World Congress in Milan (continued) The ACI FX Committee has responded to some important surveys, such as the Financial Stability Board’s request for answers as they consulted with the market on FX benchmarking, and to the Bank of England’s Fair and Effective Market Review, which closed for consultation just last week. Of particular note is the Chair of that Committee, Mr Stephane Malrait, who brings it all together, and a special mention to a wonderful lady named Anne-Maria Rothenstein who is unable to be here this evening, but has given her time freely to review our documents and contribute so solidly. Attendance at the ACI World Congress The congress was attended by 1450 delegates from all over the world. Brigid Taylor, ACI SA President, represented Africa on the ACI Managing Board Saiyuri Charles, SA Treasurer, represented SA and proxy votes for Kenya,Mauritius, Ghana, Zimbabwe, & Uganda 4 However, ACI is an organisation that includes increasingly diverse types of members, and we must ensure we cater to their interests and needs as well, and that we demand a lot of the leadership in these areas: ACI Italy is a great example of a body that holds professional members from FX, of course, but also from Money Markets, Treasury and Asset Liability Management, Fixed Income and a wide variety of other activities in the wholesale markets. There is room for leaders to step up globally and lead these areas, and we welcome your contribution. The same is true of perhaps our most visible Committee, the Committee for Professionalism, which for years has been the keeper of the ACI’s worldfamous and respected Model Code. The ACI Model Code is in very strong demand as the scandals of FX manipulation and Libor setting have costs us all so dearly. It is Mr David Woolcock and his team on the CFP that have held the light high, and who have shown that we, as a diverse Association of volunteers, can teach the financial community about best ethical practices, and that many bankers are focussed on ethical conduct. While so many large players seem to have forgotten that ethical conduct and trust are the single most important aspect of trading, that “Our Word Is Our Bond”, our ACI CFP has held the answers. And now, as the world seeks answers to these challenges, we as the ACI can provide them. Over the past months the Bank of England has been leading the industry-wide consultation known as the Fair and Effective Markets Review. It intends to focus on providing fair and effective markets to assist with growth in the global economy, and will review all products across the Fixed Income, Currency and Commodity space, also known as FICC. Among the FEMR work is a review of the need for ethical conduct training, and ethical conduct rules, and how these rules and training packages might be applied globally. Globally similar yet distinct regulatory regimes means that the central bankers and regulators themselves need to allow our 24 hour a day market to function by endorsing the best practices in the market. If the central bankers know how these markets function, they will be ready to endorse our proposals, as our proposals are not only global, they are best practice. There is another saying that sailors use: The expression is: If you don’t know to which port you are sailing, no wind is favourable. We know where we are sailing, and we are guided by our Model Code and best industry practices. It is not just the ACI and the Bank of England that is calling for ethical conduct and training: earlier this week the Financial Times reported that the British Bankers Association is also calling for regime change. Fair and Effective Markets Review and ACI This paper is the result of considered debate amongst the members of the ACI FMA appointed leadership and members, and is intended to provide our unbiased replies to the issues discussed in the FEMR Consultation on FICC, prepared by the FEMR team. The ACI FMA welcomes the opportunity to engage with the FEMR on this subject. The ACI believes that the debate about the role of a variety of subjects within the FICC markets is a positive development, and should take place in a public forum. The benefits of transparency on the debate are numerous, and include the need for the public to understand market complexity, and the benefits that the broader economy derives from having fair and effective markets in continuous operation. For this reason, the FEMR Consultation Document, and the responses from the various market participants to the document, will help the regulators, industry participants and the public to be better educated on the structure and uses of the fixed income, currency and commodity markets. The greater awareness that comes from this knowledge will assist the industry in assuring that best practices, especially ethical conduct, are followed. Importantly, the ACI welcomes the elevated importance that the Consultation Document places on the behaviour and ethical conduct of individual market participants. The FEMR Consultation Document reflects the need for individual behaviour to be held to the highest standards of ethical conduct, and mentions the ACI Model Code. Key Message The ACI FMA is firmly of the belief that the ACI Model Code should be adopted formally by the industry on both the “buy-side” and the “sell-side” and applied across the globe. As is stated by the FSB Consultative Document on Benchmarking, for codes of conduct to be effective they must be adhered to. The use of a single, globally recognised, industry-wide, unbiased code, that addresses the specific issues of the foreign exchange market (among others) will provide a tremendous amount of value to this challenge. Disseminating conduct expectations and training staff on the uses of the sections of the ACI Model Code should be a minimum requirement for market participants. The ACI strongly endorses the application of the ACI Model Code to the ethical and behavioural issues addressed in the FEMR Consultation Document. The ACI FMA also reminds the reader that the ACI Model Code makes a clear statement about the responsibilities of management and supervisors to ensure that codes of conduct are adhered to. Single-platform (company) and national/ regional codes may sit alongside a global code, but there should be few (if any) differences in the application of these codes on market practice. Any differences increase the risk of ethical arbitrage amongst market participants, and give rise to the issues about which the Consultation Document was written. For this to be effective, the regulators need to agree to the terms, understand both the code’s guidelines and how they are applied, and allow individuals and institutions to be confident that following these guidelines will be accepted as appropriate. Download ACI response here. 5 Hot off the press Marshall Bailey, President, ACI – The Financial Markets Association, Paris, Franc The central issue in the recent FX scandal remains not so much the structure and operation of the market as the behaviour and ethical conduct of individual participants, which ideally would be the adherence to a global set of standards that are internationally applicable. It is for this reason that we welcome the co-ordinated consideration by central banks and global regulatory bodies of the adoption of an international code of conduct to govern the rules and behaviour of financial market professionals as individuals. ARTICLE CAN BE FOUND HERE. The ACI’s Model Code clearly defines the principles and ethics that professionals should adhere to in order to uphold market standards. It is the logical bedrock for a formally adopted global standard governing behaviour and ethics across financial markets . By implementing these standards, financial markets demonstrate their work to regain public trust in its institutions, underpinning global commerce. More progressive banks and clients have already decided to return to the ACI Model Code, and are showing leadership. We provide a moral compass and a global standard to which all professionals can adhere, regardless of institution, market segment or region. Regulation by itself is not the answer. FX is a global market, and regional regulation would be both costly and ineffective and lead to 6 regulatory arbitrage and other unintended consequences. Likewise, the existence of competing model codes risks creating an uneven playing field, creating a lack of clarity and further distorting a market that is fracturing due to other areas of national/international regulation. Further convergence of the global codes has been discussed. The Bank of England’s Non-Investment Products Code directly references the ACI Model Code as the standard for market conduct. In addition, the European Central Bank and a wide range of central banks formally endorse the ACI Model Code. When it comes to market reform, it is as critical to avoid ethical arbitrage, with different regions and institutions applying their own codes of conduct as it is to avoid regulatory arbitrage, which tends to drive trading institutions to less-stringent regulatory jurisdictions. While a number of complex components of the industry are being reviewed, individual behaviour must not be forgotten. Financial market participants must be trained properly, and held to a very high standard. This must be backed up by appropriate legal systems that can deal with any malfeasance. Get the wrongdoers out, by all means, but let’s assist those seeking to evolve and improve to do so. “...adherence to a global set of standards that are internationally applicable…” Hot off the press Colin Lambert writes: There are people in this industry trying to shoot themselves in the foot, but the collateral damage will include the wider industry. The losses from last week’s event continue to build as more are revealed, especially in the hedge fund world where BlueCrest and Fortress are both reported to have taken a serious hit and in the case of the former, shut one of their funds. They are not the first and won’t be the last. But that is not what is worrying me. If I may philosophise for a moment, in life one has to take the ups and down – think Kipling. It is the same in trading, sometimes you just have to take losses. I cannot think of a bigger PR disaster than chasing clients for losses after you unilaterally changed the rates on their trades. Not only is it awful PR, it is likely to end up costing nearly as much in legal fees when the inevitable happens and the lawyers get involved. My understanding is that one or two banks in the immediate aftermath of the mayhem were trying to change rates but very quickly realised this was not a good path to follow. Saxo Bank clearly didn’t get that memo and now finds its name splashed over the world’s press chasing down small investors for money they don’t have after the bank unilaterally changed the rates it offered on executed trades. A good example of the press can be found here This brings home the fear I expressed on Monday, that institutions will try to push the loss onto the individual. This cannot end well for the industry. It’s a tricky one of course, because Saxo clearly believes it is on solid legal ground, it has a Product Disclosure Statement that covers just about everything, but is it? The problem is that the system generated trades and then the institution tried to roll them back. What would have happened had a voice trader quoted those prices, or exercised those stops? The trade would have to stand I would have thought? I have written previously about how best practice guides need updating to better reflect the modern market and this is yet another example of that. ACI – The Financial Markets Association has done a tremendous amount of work to update its Model Code, but this highlights just how much is left to be done. Part of the problem last week was systems generating trades automatically from stop loss orders. The Model Code has a clause about stop losses on e-platforms, it reads as follows: “Additional attention should be paid where e-trading platforms automatically execute stop-loss orders. In accepting these orders, whilst an institution assumes an obligation to make every reasonable effort to execute the order promptly, there is no guarantee of fixed price execution to the counterparty unless otherwise agreed by both parties in writing (my italics).” The Model Code is the most comprehensive best practices guideline out there but even that cannot yet cover everything. The closest I could find is in the “Dealing Through Brokers” section, which states, “Dealers should regard themselves as bound to a deal once the price and any other key commercial terms have been agreed.” “...The Model Code is the most comprehensive best practices guideline out there but even that cannot yet cover everything. The closest I could find is in the “Dealing Through Brokers” section, which states, “Dealers should regard themselves as bound to a deal once the price and any other key commercial terms have been agreed.” This could conceivably be transferred to the electronic market, but then the Code goes onto state, “However, holding voice brokers unreasonably to a price is viewed as unprofessional and should be discouraged by management.” The problem facing the best practice codes (and probably the lawyers when it gets to that stage) is how to decide whether holding someone offering auto-stops to a price is “unreasonable”? Continue reading on p.8... 7 Hot off the press (continued) The problem for everyone here was that there were trades at most big figures all the way down – the amounts were minimal but trades were executed and that removes the threat of them being “off-market” which would involve a cancel and re-book. The market traded there so it could be reasonable to assume that the institution concerned could cover the trade. But of course it wasn’t able to. In a voice driven world, as The Model Code states, there would be no guarantee of the rate, the trader would not guarantee the level, especially in such a high risk situation (and we all knew there were huge stops below 1.2000) so why should stops be guaranteed in the electronic world? Well they shouldn’t, but here is the problem. The system generated a trade, it was matched and in many cases sent to CLS or a prime broker, where it was again matched and the admin done. At what point does a trade become a trade? It sounds a silly question, but current events are bringing this into question. I would have thought when the trade is confirmed by both parties then it’s done, which is a bit of a problem in the e-world, where autoconfirmations speed up the process to the extent that the only thing likely to stop these trades getting down is pulling the plug on the platform. Of course, pull the plug on the platform and you pass the buck to your clients, but it’s probably a more subtle way of stuffing them than going after the clients after the event. Your credibility will be damaged, but not destroyed – cynical as that view may be. My personal view is that the parties simply need a log of trades on EBS for EUR/CHF on January 15. If the market traded within 100 points of the stop then there was a legal trade in the market and unfortunately that’s the way it goes for the institution. The problem is though, that it’s a very dangerous precedent saving your clients from massive losses. Those brokers that honoured the stops and took the hit themselves appear to be having a field day telling everyone how they wouldn’t dream of changing rates like some others. All well and good, but they are also effectively saying to their clients they would do it again. What happens if an even bigger event happens (I can’t think it will, but then none of us foresaw the magnitude of last week’s mayhem). What happens if they cannot or will not? We’re back in the courts. For now though, and from a personal point of view, I would really prefer those that have made money day-in-day-out from their customers take their hit when it (very occasionally) comes along. Also, these events highlight the amount of work facing those managing best practice guidelines and stresses how they need to ensure they more accurately reflect the modern market. It may be legally OK to change these rates (I’m still not sure), but morally it looks wrong – it just looks like the big guy beating up on the little guy while he’s down. 8 ACI hosted the Chair for The ACI Committee for Professionalism ACI hosted the Chair for The ACI Committee for Professionalism at a breakfast at the Hyatt on 3 March. The discussion was focussed on ACI's commitment to the industry to assist financial institutions to be compliant and apply global best practices with the implementation of the ACI 9 Model Code online continuous learning tool." ACI also presented at the Annual Thomson Reuters Trading Africa Summit in Cape Town from 4-5 March - Regulations and ethical principles were a hot topic and the market both offshore and in Africa recognises the impact ACI is making globally. Contact Us Should you have any queries or comments for the members of ACI SA, please do not hesitate to contact us here.
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