3. Execution

EXECUTION

LEADING PRINCIPLE:

Market Participants are expected to exercise care when negotiating and executing transactions in order to promote a robust, fair, open, liquid, and appropriately transparent FX Market.

The FX execution landscape is diverse, with execution taking place through many different channels and with Market Participants taking on different roles with regard to that execution. All FX Market Participants, regardless of their role in the execution of transactions, should behave with integrity to support the effective functioning of the FX Market.

PRINCIPLE 8

Market Participants should be clear about the capacities in which they act.

Market Participants should understand and clearly communicate their roles and capacities in managing orders or executing transactions. Market Participants may have a standing agreement or other terms of business as to their roles that govern all trades, or they may manage their relationship by determining their roles on a trade-by-trade basis. If a Market Participant wishes to vary the capacity in which it or its counterpart acts, any such alternative arrangement should be agreed by both parties.

A Market Participant receiving a Client ¹ order may:

act as an Agent ², executing orders on behalf of the Client pursuant to the Client mandate, and without taking on market risk in connection with the order; or
act as a Principal ³ taking on one or more risks in connection with an order, including credit risk and varying degrees of market risk. Principals act on their own behalf and there is no obligation to execute the order until both parties are in agreement. Where the acceptance of an order grants the Principal executing the order some discretion it should exercise this discretion reasonably, fairly, and in such a way that is not designed or intended to disadvantage the Client.

PRINCIPLE 9

Market Participants should handle orders fairly and with transparency in line with the capacities in which they act.

Market Participants are expected to handle orders with fairness and transparency. How this is done, and what the relevant good practices are, vary depending upon the role in which those Market Participants are acting, as described in Principle 8 above. While the FX Market has traditionally operated as a Principal-based market, Agency-based execution also takes place. Accordingly, this principle takes into account both Principal and Agency models as well as FX E-Trading Platforms ⁴ and Interdealer Brokers.

ROLES

Irrespective of their role, Market Participants handling orders should:

have clear standards ⁵ in place that strive for a fair and transparent outcome for the Client ⁶
be truthful in their statements
use clear and unambiguous language
make clear whether the prices they are providing are firm or merely indicative
have adequate processes in place to support the rejection of Client orders for products they believe to be inappropriate for the Client
not enter into transactions with the intention of disrupting the market (see Principle 12 in Execution for further guidance); and
provide all relevant disclosures and information to a Client before negotiating a Client order, thereby allowing the Client to make an informed decision as to whether to transact or not.

Market Participants should make Clients aware of such factors as:

how orders are handled and transacted, including whether orders are aggregated or time prioritised
the potential for orders to be executed either electronically or manually, depending on the disclosed transaction terms
the various factors that may affect the execution policy, which would typically include positioning, whether the Market Participant managing Client orders is itself taking on the associated risk or not, prevailing liquidity and market conditions, other Client orders, and/or a trading strategy that may affect the execution policy
where discretion may exist or may be expected, and how it may be exercised
the basis on which trade requests and/or orders might be rejected; and
whenever possible, what the time-stamping policy is and whether it is applied both when the order is accepted and when it is triggered or executed (see Principle 36 in Risk Management and Compliance for further guidance).

Market Participants handling Client orders in a Principal role should:

disclose the terms and conditions under which the Principal will interact with the Client, which might include:
- that the Principal acts on its own behalf as a counterparty to the Client;
- how the Principal will communicate and transact in relation to requests for quotes, requests for indicative prices, discussion or placement of orders, and all other expressions of interest that may lead to the execution of transactions; and
- how potential or actual conflicts of interest in Principal-dealing and market making activity may be identified and addressed;
establish clarity regarding the point at which market risk may transfer;
have market-making and risk management activity, such as hedging, commensurate with their trading strategy, positioning, risk assumed, and prevailing liquidity and market conditions; and
have internal Mark Up ⁷ policies consistent with applicable guidelines elsewhere in this Global Code.

Market Participants handling Client orders in an Agent ⁸ role should:

communicate with the Client regarding the nature of their relationship
seek to obtain the result requested by the Client
establish a transparent order execution policy that should supply information relevant to the Client order that may include:
- information on where the firm may execute the Client orders
- the factors affecting the choice of execution venues
- information as to how the Agent intends to provide for the prompt, fair, and expeditious execution of the Client order
be transparent with the Client about their terms and conditions, which clearly set out fees and commissions applicable throughout the time of the agreement
share information relating to orders accepted on an Agency basis with any market making or Principal trading desks only as required to request a competitive quote. (See Principle 19 in Information Sharing for further guidance.)

Market Participants operating FX E-Trading Platforms should:

have rules that are transparent to users
make clear any restrictions or other requirements that may apply to the use of the electronic quotations
establish clarity regarding the point at which market risk may transfer
have appropriate disclosure about subscription services being offered and any associated benefits, including market data (so that Clients have the opportunity to select among all services they are eligible for).
explicitly state their policies on sharing Client interaction data i.e. order or transaction data derived from client interactions, that is not anonymized and not aggregated, with third parties, within applicable disclosure documents (including rulebooks, guidelines, etc.), including at a minimum:
- what level of detail is available;
- which user types they are available to; and
- with what frequency and latency these data are available.

Client interaction data include but are not limited to data on potential or actual FX transactions by clients, including requests for quotes, and other transaction data related to a Client order or trade execution;

This does not apply to data shared with third parties with explicit Client consent, or in accordance with Principle 20 which includes data shared with third parties such as regulatory or public authorities;

To allow Clients to compare data sharing policies more easily, the use of the GFXC’s Disclosure Cover Sheets is encouraged.

Market Participants operating anonymous FX E-Trading Platforms that feature unique identifiers (“tags”) should, where applicable:

have appropriate disclosure to all users of what specific counterparty information is provided for tags, and to whom this information is provided
have appropriate disclosure to all users indicating at what point in a transaction a user tag is provided to their counterparty
have disclosure documents (including rulebooks, guidelines, etc.) that contain clear policies related to how tags are assigned and managed, including policies related to re-tagging
maintain audit trails for all tag assignments and re-tags.

Market Participants acting as Interdealer Brokers (IDBs ⁹) should:

meet similar expectations as described above for Market Participants handling Client orders in an Agent role

IDBs may operate via voice, such as Voice Brokers ¹⁰, or may operate either partially or wholly electronically. Those with an electronic component are also considered FX E-Trading Platforms and thus should also meet the expectations described for Market Participants operating FX E-Trading Platforms.

Market Participants acting as Clients should:

be aware of the responsibilities they should expect of others as highlighted above
be aware of the risks associated with the transactions they request and undertake
regularly evaluate the execution they receive

PRINCIPLE 10

Market Participants should handle orders fairly; with transparency, and in a manner consistent with the specific considerations relevant to different order types.

Market Participants should be aware that different order types may have specific considerations for execution. For example:

Market Participants handling a Client’s Stop Loss Order ¹¹ should:

obtain from the Client the information required to fully define the terms of a Stop Loss Order, such as the reference price, order amount, time period, and trigger
disclose to Clients whether risk management transactions may be executed close to a Stop Loss Order trigger level, and that those transactions may impact the reference price and result in the Stop Loss Order being triggered.
Indicative Examples of Unacceptable Practices:
- trading or otherwise acting in a manner designed to move the market to the Stop Loss level; and
- offering Stop Loss Orders on a purposefully loss-making basis

Market Participants filling a Client order, which may involve a partial fill, should:

be fair and reasonable based upon prevailing market circumstances, and any other applicable factors disclosed to the Client, in determining if and how a Client order is filled, paying attention to any other relevant policies
make a decision on whether, and how, to fill a Client order, including partial fills, and communicate that decision to the Client as soon as practicable
fully fill Client orders they are capable of filling within the parameters specified by the Client, subject to factors such as the need to prioritise among Client orders and the availability of the Market Participant’s credit line for the Client at the time

Market Participants handling a Client’s order to transact at a particular fixing rate (Fixing Order ¹²):

should understand the associated risks and be aware of the appropriate procedures
should not, whether by collusion or otherwise, inappropriately share information or attempt to influence the exchange rate
should not intentionally influence the benchmark fixing rate to benefit from the fixing, whether directly or in respect of any Client-related flows at the underlying fixing
should behave consistently with the Financial Stability Board’s Foreign Exchange Benchmark Report Recommendations, ¹³See the Financial Stability Board Final Report on Foreign Exchange Benchmarks, September 30, 2014 including but not limited to:
- pricing transactions in a manner that is transparent and is consistent with the risk borne in accepting such transactions; and
- establishing and enforcing internal guidelines and procedures for collecting and executing Fixing Orders.

Indicative Examples of Acceptable Practices:

transacting an order over time before, during, or after its fixing calculation window, so long as not to intentionally negatively impact the market price and outcome to the Client.
collecting all Client interest and executing the net amount

Indicative Examples of Unacceptable Practices:

buying or selling a larger amount than the Client’s interest within seconds of the fixing calculation window with the intent of inflating or deflating the price against the Client
buying or selling an amount shortly before a fixing calculation window such that there is an intentionally negative impact on the market price and outcome to the Client
showing large interest in the market during the fixing calculation window with the intent of manipulating the fixing price against the Client;
informing others of a specific Client dealing at a fixing rate; and
acting with other Market Participants to inflate or deflate a fixing rate against the interests of a Client. (See Principles 19 and 20 in Information Sharing for further guidance.)

Market Participants handling orders that have the potential to have sizable market impact should do so with particular care and attention. For example, there are certain transactions that may be required in the course of business, such as those related to merger and acquisition activity, which could have a sizable impact on the market.

Market Participants who initiate Client orders in a Principal role, where execution of FX Transactions is subject to a written agreement in advance with the Client identifying when the Market Participant should initiate such FX Transactions (such as auxiliary services to facilitate a securities or futures transaction or FX hedging services agreements), should:

Operate within the parameters of that written agreement;
Establish and disclose a transparent order execution policy including:
- Factors affecting the execution of Client orders;
- Factors affecting the choice of execution venues; and
- Information as to how the Principal provides fair and transparent execution of Client orders.
Be transparent with the Client about terms and conditions, principally setting out fees and commissions applicable throughout the time of the agreement; and
Make available sufficient information to enable the Client to assess the quality of execution. Where available, this should include the date and time of execution along with market reference rates (internal or external) at the time of execution.

PRINCIPLE 11

A Market Participant should only Pre-Hedge Client orders when acting as a Principal, and should do so fairly and with transparency.

Pre-Hedging is the management of the risk associated with one or more anticipated Client orders, designed to benefit the Client in connection with such orders and any resulting transactions.

Market Participants may Pre-Hedge for such purposes and in a manner that is not meant to disadvantage the Client or disrupt the market. Market Participants should communicate their Pre-Hedging practices to their Clients in a manner meant to enable Clients to understand their choices as to execution.

In assessing whether Pre-Hedging is being undertaken in accordance with the principles above, a Market Participant should consider prevailing market conditions (such as liquidity) and the size and nature of the anticipated transaction.
While undertaking Pre-Hedging, a Market Participant may continue to conduct ongoing business, including risk management, market making, and execution of other Client orders. When considering whether Pre-Hedging is being undertaken in accordance with the principles above, Pre-Hedging of a single transaction should be considered within a portfolio of trading activity, which takes into account the overall exposure of the Market Participant.
When a Market Participant is acting as an Agent ¹⁴, the Market Participant should not Pre-Hedge

See Annex 1 for a set of stylised examples regarding Pre-Hedging

PRINCIPLE 12

Market Participants should not request transactions, create orders, or provide prices with the intent of disrupting market functioning or hindering the price
discovery process.

Market Participants should not engage in trading strategies or quote prices with the intent of hindering market functioning or compromising market integrity. Such strategies include those that may cause undue latency, artificial price movements, or delays in other Market Participants’ transactions and result in a false impression of market price, depth, or liquidity. Such strategies also include collusive and/or manipulative practices, including but not limited to those in which a trader enters a bid or offer with the intent to cancel before execution (sometimes referred to as “spoofing,” “flashing.” or “layering”) and other practices that create a false sense of market price, depth, or liquidity (sometimes referred to as “quote stuffing” or “wash trades”).

Market Participants providing quotations should always do so with a clear intent to trade. Prices provided for reference purposes only should clearly be labelled as such.

Market Participants should give appropriate consideration to market conditions and the potential impact of their transactions and orders. Transactions should be conducted at prices or rates based on the prevailing market conditions at the time of the transaction. Exceptions to this, such as historical rate rollovers, should be covered by internal compliance policies.

Without limitation, Market Participants handling Client orders may decline a transaction when there are grounds to believe that the intent is to disrupt or distort market functioning. Market Participants should escalate as appropriate.

See Annex 1 for a set of stylised examples regarding handling of orders and market disruptions.

PRINCIPLE 13

Market Participants should understand how reference prices, including highs and lows, are established in connection with their transactions and/or orders.

This understanding should be supported by appropriate communications between the parties, which may include disclosures. In the event that a third-party pricing source is an input in establishing this reference price, both parties should understand how that pricing measure is determined and what the contingency arrangements are in the event that the third-party pricing is unavailable.

PRINCIPLE 14

The Mark Up applied to Client transactions by Market Participants acting as Principal should be fair and reasonable.

Mark Up is the spread or charge that may be included in the final price of a transaction in order to compensate the Market Participant for a number of considerations, which might include risks taken, costs incurred, and services rendered to a particular Client ¹⁵.

Market Participants should promote transparency by documenting and publishing a set of disclosures regarding their FX business that, among other things:

makes it clear to Clients that their final transaction price may be inclusive of Mark Up
makes it clear to Clients that different Clients may receive different prices for transactions that are the same or similar
helps Clients understand the determination of Mark Up, such as by indicating the factors that may contribute to the Mark Up (including those related to the nature of the specific transaction and those associated with the broader Client relationship, as well as any relevant operating costs)
discloses to Clients how Mark Up may impact the pricing and/or execution of any order linked to or triggered at a specific level.

Firms should have policies and procedures that enable personnel to determine an appropriate and fair Mark Up. These policies and procedures should include, at a minimum:

guidance that prices charged to Clients should be fair and reasonable considering applicable market conditions and internal risk management practices and policies
guidance that personnel should always act honestly, fairly, and professionally when determining Mark Up, including not misrepresenting any aspect of the Mark Up to the Client

Market Participants should have processes to monitor whether their Mark Up practices are consistent with their policies and procedures, and with their disclosures to Clients. Mark Up should be subject to oversight and escalation within the Market Participant.

See Annex 1 for a set of stylised examples regarding Mark Up.

PRINCIPLE 15

Market Participants should identify and resolve trade discrepancies as soon as practicable to contribute to a well-functioning FX Market.

Market Participants should have effective policies and procedures designed to minimise the number of trade discrepancies arising from their FX Market activities and should manage such discrepancies promptly.

Market Participants acting as Prime Brokers ¹⁶ play a unique role in assuming the credit risk of authorised trades executed by their Prime Brokerage Clients. Where the Client identity is known, Prime Brokerage Clients and executing dealers are responsible for resolving trade discrepancies to achieve timely amendments and matching of trade terms through the Prime Broker.

When anonymous market access is provided, the access provider should assist in the resolution of trade discrepancies.

See Principle 48 for Confirmation and Settlement discrepancies.

PRINCIPLE 16

Market Participants acting as Voice Brokers should only employ name switching where there is insufficient credit between parties to the transaction.

Voice Brokers ¹⁷ that undertake name switching should:

have proper controls and appropriately monitor such transactions
have proper approvals
execute, and book, such transactions as promptly as possible, consistent with the appropriate protection of related Confidential Information ¹⁸
maintain proper records of such activity

A dealer should not solicit or accept favours from a Voice Broker for switching names.

PRINCIPLE 17

Market Participants employing last look should be transparent regarding its use and provide appropriate disclosures to Clients.

Last look is a practice utilised in Electronic Trading Activities ¹⁹ whereby a Market Participant receiving a trade request has a final opportunity to accept or reject the request against its quoted price. Market Participants receiving trade requests that utilise the last look window should have in place governance and controls around its design and use, consistent with disclosed terms. This may include appropriate management and compliance oversight.

A Market Participant should be transparent regarding its last look practices in order for the Client to understand and to be able to make an informed decision as to the manner in which last look is applied to their trading. The Market Participant should disclose, at a minimum, explanations regarding whether, and if so how, changes to price in either direction may impact the decision to accept or reject the trade, the expected or typical period of time for making that decision, and more broadly the purpose for using last look.

If utilised, last look should be a risk control mechanism used in order to verify validity and/or price. The validity check should be intended to confirm that the transaction details contained in the request to trade are appropriate from an operational perspective and there is sufficient available credit to enter into the transaction contemplated by the trade request. The price check should be intended to confirm whether the price at which the trade request was made remains consistent with the current price that would be available to the Client.

In the context of last look, the Market Participant has sole discretion, based upon the validity and price check processes, over whether the Client’s trade request is accepted or not, leaving the Client with potential market risk in the event the trade request is not accepted. Accordingly, and consistent with related principles in the Global Code:

Last look should not be used for purposes of information gathering with no intention to accept the Client’s request to trade.
Confidential Information arises at the point the Market Participant receives a trade request at the start of the last look window, and use of such Confidential Information should be consistent with Principles 19 and 20 on Information Sharing.
Market Participants should not conduct trading activity that utilises the information from the Client’s trade request during the last look window. Such trading activity would include (1) any pricing activity on FX E-Trading Platforms that incorporates information from the trade request and (2) any hedging activity that incorporates information from the trade request. Such activity would risk signalling to other Market Participants the Client’s trading intent and could move market prices against the Client. In the event that the Client’s trade requests were subsequently rejected, such trading activity could disadvantage the Client.

This guidance does not apply to an arrangement that features all of the following characteristics:

An explicit understanding that the Market Participant will fill the Client’s trade request without taking on market risk in connection with the trade request by first entering into offsetting transactions in the market.
The volume traded in the last look window will be passed on to the Client in its entirety.
This understanding is appropriately documented and disclosed to the Client.

It is good practice for Market Participants to be available to engage in a dialogue with Clients regarding how their trade requests have been handled, including the appropriate treatment of information associated with those trade requests. Such dialogue could include metrics that facilitate transparency around the pricing and execution of the Client’s trade requests and assist a Client in evaluating the handling of its trade requests in order to evaluate whether the execution methodology continues to meet its needs over time.

PRINCIPLE 18

Market Participants providing algorithmic trading or aggregation services to Clients should provide adequate disclosure regarding how they operate.

Market Participants may provide Clients with algorithmic trading services that use computer programs applying algorithms to determine various aspects, including price and quantity of orders.

Market Participants may also provide aggregation services to Clients, services that provide access to multiple liquidity sources or execution venues and that may include order routing to those liquidity sources or venues.

Market Participants providing algorithmic trading or aggregation services to Clients should disclose the following:

a clear description of the algorithmic execution ²⁰ strategy or the aggregation strategy and sufficient information to enable the Client to evaluate the performance of the service, in a manner that is consistent with appropriate protection of related Confidential Information
whether the algorithm provider or the aggregation service provider could execute as Principal
the fees applicable to the provision of the services
in the case of algorithmic trading services, general information regarding how routing preferences may be determined
in the case of aggregation services, information on the liquidity sources to which access may be provided

Market Participants providing algorithmic trading or aggregation services should disclose any conflicts of interest that could impact the handling of any Client order (for example, arising from their interaction with their own principal liquidity, or particular commercial interests in trading venues or other relevant service providers) and how such conflicts are addressed.

Market Participants providing algorithmic trading services to Clients are encouraged to share disclosure information in a market-wide standardised format – for example, by aligning with the structure of the GFXC’s FX Algo Due Diligence Template where appropriate, to allow Clients to more easily compare and understand the services. Such disclosure information should be easily available to both existing and prospective Clients – for example, by being shared bilaterally or made available publicly on the provider’s website.

Market Participants providing algorithmic trading services to Clients are encouraged to disclose pertinent information to be used for the purpose of Transaction Cost Analysis (TCA ²¹) in a market-wide standardised format – for example, by using the GFXC’s Transaction Cost Analysis Data Template. Additional data should be provided if it is considered useful.

Clients of algorithmic trading providers should use such data and disclosed information in order to evaluate, on an ongoing basis, the appropriateness of the trading strategy to their execution strategy.

Clients that use an aggregator to access trading venues should understand the parameters that will define the prices displayed by the aggregator.

Market Participants providing algorithmic trading or aggregation services should provide services that perform in the manner disclosed to the Client.

1
Client: A Market Participant requesting transactions and activity from, or via, other Market Participants that provide market making or other trade execution services in the FX Market. A Market Participant can act as a Client in some instances while making markets in other instances ↩︎
2
A Market Participant that executes orders on behalf of its Clients pursuant to the Client mandate, and without taking on market risk in connection with the order ↩︎
3
Principal: A Market Participant who transacts for its own account ↩︎
4
FX E-Trading Platform: Any system that allows Market Participants to execute trades electronically in the FX Market ↩︎
5
Standards: A Market Participant’s internal policies, external codes (the FX Global Code and any annexes to the Code published by regional FX committees or jurisdictions in which the Market Participant is based or operating), and other relevant guidance (for example, guidance provided by public sector international organizations such as the Bank for International Settlements and the Financial Stability Board) ↩︎
6
Client: A Market Participant requesting transactions and activity from, or via, other Market Participants that provide market making or other trade execution services in the FX Market. A Market Participant can act as a Client in some instances while making markets in other instances ↩︎
7
Mark Up: The spread or charge that may be included in the final price of a transaction in order to compensate the Market Participant for a number of considerations, which might include risks taken, costs incurred, and services rendered to a particular Client ↩︎
8
A Market Participant that executes orders on behalf of its Clients pursuant to the Client mandate, and without taking on market risk in connection with the order ↩︎
9
Interdealer Broker (IDB): A financial intermediary that facilitates transactions between broker-dealers, dealer banks, and other financial institutions rather than private individuals. This includes brokers executing by voice or electronic means, or a hybrid thereof. Brokers with any degree of electronic execution are also a subcategory of FX E-Trading Platforms ↩︎
10
Voice Broker: An Interdealer Broker with responsibility to both counterparties, who negotiates FX transactions via telephone, conversational systems, and/or hybrid solutions ↩︎
11
Stop Loss Orders: A contingent order that triggers a buy or sell order for a specified notional amount when a reference price has reached or passed a pre-defined trigger level. There are different variants of Stop Loss Orders, depending on the execution relationship between counterparties, the reference price, the trigger, and the nature of the triggered order. A series of parameters are required to fully define a Stop Loss Order, including the reference price, order amount, time period, and trigger ↩︎
12
An order to transact at a particular fixing rate ↩︎
13
See the Financial Stability Board Final Report on Foreign Exchange Benchmarks, September 30, 2014 ↩︎
14
A Market Participant that executes orders on behalf of its Clients pursuant to the Client mandate, and without taking on market risk in connection with the order ↩︎
15
Client: A Market Participant requesting transactions and activity from, or via, other Market Participants that provide market making or other trade execution services in the FX Market. A Market Participant can act as a Client in some instances while making markets in other instances ↩︎
16
Prime Broker (PB): An entity that provides credit intermediation to one or more parties to a trade based on pre-agreed terms and conditions governing the provision of such credit. The Prime Broker can also offer subsidiary or allied offerings, including operational and technology services ↩︎
17
Voice Broker: An Interdealer Broker with responsibility to both counterparties, who negotiates FX transactions via telephone, conversational systems, and/or hybrid solutions ↩︎
18
Confidential Information: Information that is to be treated as confidential, including FX Trading Information and Designated Confidential Information ↩︎
19
Electronic Trading Activities: These activities may include operating an FX E-Trading Platform, making and/or taking prices on an FX E-Trading Platform, and providing and/or using trading algorithms on an FX E-Trading Platform (FXETP: Any system that allows Market Participants to execute trades electronically in the FX Market). ↩︎
20
Trade execution through computer programs that apply algorithms. For example, at the most basic level, a computer program automates the process of splitting a larger order known as the ‘parent order’ into multiple smaller orders known as ‘child orders’, and executes them over a period of time ↩︎
21
Transaction Cost Analysis (TCA): Analysis to evaluate the quality of trade execution – for example, by comparing the resultant price of an execution against a benchmark ↩︎

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