Investment Association calls for standardisation of unsuccessful FX trades

Wednesday 5 February 2020

New standardised categories to simplify the processing of unsuccessful trades on the foreign exchange (FX) markets have today been proposed by the Investment Association (IA), in a bid to bring greater consistency to the market and improve outcomes for investors. 

Under the proposals, when a request by an investment manager to trade on the FX markets is not executed, the brokers, dealers and platforms (‘execution providers’) will be asked to use 13 new high-level reject code categories to organise their current use of reject codes: a shorthand identifier explaining why a trade has not been executed. The proposed high-level categories will allow information on why a trade was unsuccessful to be communicated quickly and consistently, allowing for faster processing by investment managers. The cause of the rejection can then be remedied quicker, to minimise any disadvantage to investors. 

The IA is asking all execution providers to match up their existing reject codes to the 13 new high-level reject code categories and report to their investment management clients by the end of Q1 2020, while recognising that some execution providers may wish to distinguish their level of service by continuing to provide additional tailored reject codes.

Galina Dimitrova, Director for Investment and Capital Markets at the Investment Association, said:

“When it comes to deciding whether, how and where to trade on the FX markets, investment managers must seek to act in the best interests of their clients. 

“Currently brokers on the FX markets have no consistent way to communicate why trades aren’t successful. Our new reject code categories help ensure the reasons for trade rejections can be analysed rapidly, so steps can be taken to put right any errors and minimise potential disadvantage to savers and investors.”

ENDS

Notes to Editor:

13 new high-level reject code categories

The following categories form part of the proposal and coincide with the two phases of the trade cycle:

Quote phase: when investment managers request a quote, but:

• Category A: Credit – the request is rejected because the credit limit of the client or its agent making the request is breached or not in place.
• Category B: Pricing outage – the request cannot be processed because the pricing is unavailable. 
• Category C: Regulatory – the request cannot be processed due to regulatory requirements not being met. 
• Category D: Risk and capital constraints – the request cannot be processed as it breaches internal risk constraints, such as country concentration limits. 
• Category E: Static Data – the request cannot be processed due to static data errors – for example, due to an error in the unique trader ID.
• Category F: Unsupported Product – the request cannot be executed because the request covers an unsupported product.   
• Category G: Exceptional – a residual category to ensure a complete set of categories exist and a reject code is always provided, and only to be used exceptionally if none of the previous six categories are appropriate. 

Trade phase: when a quote has been provided to an investment manager, but the subsequent attempt to trade has been rejected:

• Category A-1: Last Look – because of the use of last look (including cover and trade): where a bank has imposed an artificial holding period, allowing them a final opportunity to accept or reject the request against its quoted price.
• Category A-2: Last Look - Latency – after it has been last looked due to inactivity, which may lead to clients attempting to execute on old pricing or liquidity that is no longer available.  
• Category B: Pricing/Liquidity Unavailable – because the client has attempted to execute the trade on a price or liquidity that is no longer available, for example because of inactivity, and it has not been last looked. 
• Category C: Credit – because the credit limit of the client or its agent has been breached or is not in place.
• Category D: Static Data – due to static data errors, such as an error in the unique trader ID.  
• Category E: Exceptional – a residual category to ensure a complete set of categories exist and a reject code is always provided, and only to be used exceptionally if none of the previous six categories are appropriate. 

These proposals were produced through consultation with the IA’s membership, banks and the Global Financial Markets Association, trading venues and trading technology providers.

Where investment managers do not deal directly with an execution provider, all parties involved in a request for a quote will need to play a role in ensuring reject codes are communicated promptly to the investment manager. This is in keeping with the Global FX Code, which the IA supports, that encourages all market participants to handle orders fairly and transparently.

The full policy document can be found here.