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BIS Releases New Code of Conduct For Foreign Exchange Trading

Bank for International SettlementsThe Bank for International Settlements (BIS) an international financial institution that is often referred to as the bank for central banks has issued a new code of conduct for foreign exchange trading. The new code comes against the backdrop of numerous scandals relating to the manipulation of foreign exchange rates that have come to light in recent times and shaken the confidence of the market.

The global code released last week consists of common standards laid down to monitor the behavior and conduct of foreign exchange traders across different criteria such as confidential information sharing, risk management, governance and trade verification. The recent scandals have resulted in traders being hesitant in sharing information transparently, making it difficult for investors to judge the timing of their trades. This also hampers central banks in assessing the impact of their policies on foreign exchange markets.

The code acknowledges that some form of information sharing is essential to ensure an open and liquid market. In light of that, BIS has asked market participants to be clearer in their communications while maintaining confidentiality. The code also requires the participants to be open with central banks when responding in context of policy purposes.

Guy Debelle, chairman of the BIS’s foreign exchange working group and assistant governor of the Reserve Bank of Australia has said that effort was necessary to restore trust between all the market participants in the foreign exchange industry and also between the market and the public. The code specifies how confidential information should be treated and has put down guidelines regarding discussions around rumors which may affect pricing and trading. It also requires traders to avoid generating rumors to influence the markets.

In a statement, David Puth, chief executive CLS Bank International, the world’s main currencies settlement house said

We are really hoping to allow the protection of market colour. Market participants should communicate appropriately but without compromising confidential information. All market participants feel as if market colour is essential for a smooth market.

The BIS developed the code of conduct taking inputs from central banks globally and over 35 representatives from varied market participants such as banks, settlement houses, asset managers. The adoption of the code is voluntary but Debelle said he expects the code to be practiced across global markets. Many market participants have expressed their support for the code including central banks and trade associations.

The second phase of the code is set to be released in a year’s time and will target institutional market concerns such as high-speed computer trading and governance.

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