Why the ACI Model Code?
“FCA warns of more fines if culture does not change” – FX Week Europe
For years*, the ACI Model Code has existed as the standard benchmark for the FX and OTC
markets, and has been recognised by industry practitioners and central bankers for the
assistance it has provided market professionals. However, other than members of the ACI –
The Financial Markets Association (ACI FMA), ethical conduct and the importance of the
Model Code have not always had the focus required. The net result of the previous lack of
focus on education and conduct issues has been a series of fines and investigations into the
behaviour of individual market participants and their supervisory environment. These
investigations have unearthed individual behaviours that are unacceptable, and have been
damaging to the industry. The focus has returned to ethical codes.
Note that these behaviours and fines are not unique to FX, as similar behaviours have been
brought to light in the Libor investigations, and other forms of practice are also coming
under review. The total cost of this is not just the sum of the global fines, but also to the
industry more broadly. Additional resources have been costly, as has been the sharply
reduced activity in the market.
It is clear that the wholesale financial markets need to reverse this behaviour by finding
industry wide solutions. Large amounts of money have been thrown at solving the problem
within individual banks, but often without a satisfactory result. Few if any institutions are
willing to take the lead by declaring themselves to have the answers. The paralysis is made
worse by most institutions wanting to wait for the result of the various consultations and
investigations, many of which have not defined their dates of closure.
Importantly, the key European regulators (such as the Bank of England/FCA/PRA in the UK
and FINMA in Switzerland) have made it clear that they are expecting the industry to
propose its own solution, and to be prepared to demonstrate the profound changes to
management and staff culture within each institution.
The answer therefore is for the industry to propose a credible code of conduct that can be
applied across the FX industry (and other wholesale OTC financial products) and to which the
industry is willing to adhere and promotes fairness and transparency.
*The origins of the ACI Model go back to the early 1970’s following on from the O’Brien Letters. In 1975 the first ACI Code of Conduct
covering foreign exchange and euro-currency dealing was published. There followed similar publications by the markets in New York
(1980), London (1990), Singapore (1991) and Tokyo in 1995.
It is important to note that the regulators are NOT seeking to impose a code of conduct, as
they fully admit that the expertise resident in the market should best determine how it
functions. It is also important that the market comprises buyers and sellers of all shapes and
sizes, none of whom want to have inappropriate regulation imposed upon them, and all of
whom want a fair and effective solution.
So what choices are available, and which is the best choice?
Codes fall into three basic categories: individual company codes, regional or sector codes,
and global codes.
Individual Company Codes
Individual company codes have a number of characteristics that make them attractive. They
can be written in house (often by outside Counsel or hired specialist advisors) and can be
tailored to match the look and feel of other policies that apply to the same institution. They
can be adapted to fit the specific needs of the institution, and can be written to suit a
particular risk culture: a highly stringent code may be more desirable in certain
circumstances than a more liberal code, depending on the parameters required. Often they
apply to the jurisdictions in which the institution operates, and do not need to be applicable
elsewhere. If desired, they can be incorporated into a training programme to help embed
the behavioural aspects of the code, and run in parallel with other in-house training
requirements.
However, they can be very expensive to produce, often to a confidence level that is difficult
to ascertain. They are usually written with the specific bias of the institution in mind, and by
one person or a small group with regard for protecting the institution. This commercial bias
may be regarded with suspicion by clients. They are not usually in line with the global
requirements of the industry, are maintained too infrequently (or at great expense) and can
be confusing to clients who have to match off their dealing needs against a large number of
individual codes.
Regional or Sector Codes
Regional codes, or codes written by a specific sector of the industry, can sometimes produce
a better result. They often address specific issues, such as value dates for trades or with an
emphasis on a certain type of trading (say, non-deliverable forwards), and may contain
information specific to their authors. They are written by representatives of that region or
by a specific sector (say, the large sell-side banks) and require a high degree of consensus to
be effective. This can make their timeliness less impressive, as the time lag between updates
can be long, and with onerous processes to produce updates. Their applicability is to the
sector or region, with limiting attributes for the broader, global markets. In all cases, they
risk creating a fractured market, or an uneven playing field, as regional codes exhibit a bias
that may favour one region or sector over another.
Global Codes
The only global code is the ACI Model Code. It is written by a group of professionals and
market practitioners for the use of market practitioners. It provides guidance on practical
matters as well as giving guidance on ethical and moral issues. It demands that individuals
be accountable for their behaviour, but also places emphasis on supervisory responsibility
and obligation. As such, it is fully aligned with the requirements of various regulators.
Importantly, it is in use around the world by a number of central bankers and regulators, as
well as by ACI members in their thousands. It is referenced in the “Global Preamble” by all
central bank FX Committees, or is used directly by them as is the case across much of Europe
and Africa, for example. This gives it value not only in developed markets like the UK, but
also across many other countries, where regulations and banking communities are less
developed.
Despite the difficulty in doing so, it has been updated regularly, and has been released in the
past weeks with some new updates. It is maintained by a group of dedicated volunteers
from across a wide variety of banks, countries, and has both sell-side and buy-side
contribution to its recommendations, giving it a legitimacy that few other codes can claim.
Individuals are able to join the Committee for Professionalism when a vacancy arises, and
bring their perspective to the debate. This ensures constant evolution, and that modern
practices are accounted for. Should there be gaps, they can be filled by making
recommendations to the ACI Committee for Professionalism.
Recently, it has an exam available to allow for suitable testing of the knowledge of the Code
by the market participants who require this guidance. This feature makes it highly attractive
for management to demonstrate its commitment to installing the best practices within their
institutions, and for senior management and directors on Boards to satisfy themselves of the
culture change taking place inside their company.
Importantly, there is no reason that the ACI Model Code can’t run in parallel with an
individual company code. Indeed, there is a good reason for doing so; individual codes are
tailored to meet specific requirements but the ACI Model Code can give credence and
credibility with clients and meet global needs. Many institutions apply both types of code,
and if there is a dispute, the stricter rule applies (or allows for a change in the individual
code).
With education, training and use, practitioners develop their own internal “moral compass”
and no longer require tight, costly surveillance as staff demonstrate their ability to conduct
their business appropriately. Experienced staff teach the less experienced how to behave
ethically, and protect the interests of clients, shareholders, their employer and the general
public.
The ACI Model Code has a number of significant attributes to bring to the wholesale
financial markets. Adopting the ACI Model Code can significantly assist the industry by
bringing a well-functioning self-regulated market back to the fore, and in serving the broader
economy. The ACI Model Code can help ensure a globally level playing field for regulation,
and can be adopted by all institutions across all jurisdictions. It can be easily embedded as
an annual attestation to the code through membership of your local ACI. This brings the
positive culture change to the industry that regulators and governments are demanding.