Circular 10/2022 — Modifies Circular 22/2017 — BANXICO — MX

256 OFFICIAL GAZETTE Wednesday, August 24, 2022 BANCO DE MEXICO CIRCULAR 10/2022 addressed to Credit Institutions, Brokerage Houses, Exchange Houses and other intermediaries that form part of Financial Groups, regarding the Modifications to Circular 22/2017 (Rules applicable to the report of participants to the Bank of Mexico regarding adherence to the Global Code of Conduct in the execution of foreign exchange transactions).

A logo appears on the margin, stating: Bank of Mexico.- “2022: Year of Ricardo Flores Magón”.

CIRCULAR 10/2022
TO CREDIT INSTITUTIONS, BROKERAGE HOUSES, EXCHANGE HOUSES AND OTHER INTERMEDIARIES THAT FORM PART OF FINANCIAL GROUPS:

SUBJECT: MODIFICATIONS TO CIRCULAR 22/2017 (RULES APPLICABLE TO THE REPORT OF PARTICIPANTS TO THE BANK OF MEXICO REGARDING ADHERENCE TO THE GLOBAL CODE OF CONDUCT IN THE EXECUTION OF FOREIGN EXCHANGE TRANSACTIONS)

The Bank of Mexico, in order to ensure the sound development of the foreign exchange market in Mexico, has determined to modify Annex 1 of the “Rules applicable to the report of participants to the Bank of Mexico regarding adherence to the Global Code of Conduct in the execution of foreign exchange transactions”, contained in Circular 22/2017. It should be mentioned that the Board of Governors of this Central Institute determined to exempt these modifications from the aforementioned public consultation process, as these only have the purpose of adapting the content of the aforementioned Rules to the terms of the Global Code of Conduct updated by the Global Foreign Exchange Committee (GFXC, in English) in its session of July 15, 2021.

For the above, based on Articles 28, sixth and seventh paragraphs, of the Political Constitution of the United Mexican States, 24, 26 and 32, of the Bank of Mexico Law, 9 of the Organic Law of National Financial Institutions, 6 of the Organic Law of the Federal Mortgage Society, 9 of the Organic Law of the Welfare Bank, 9 of the Organic Law of the National Foreign Trade Bank, 10 of the Organic Law of the National Bank of Public Works and Services, 8 of the Organic Law of the National Bank of the Army, Air Force and Navy, 19 of the Organic Law of the National Financial Institution for Agricultural, Rural, Forestry and Fisheries Development, 22 of the Law for Transparency and Ordering of Financial Services, 4, first paragraph, 8, fourth and eighth paragraphs, 10, first paragraph, 12, first paragraph, in relation to 19 Bis, fraction V, and 14 Bis, first paragraph, in relation to 17, fraction I, of the Internal Regulations of the Bank of Mexico, which grant it the authority to issue provisions through the General Directorate of Central Banking Operations and the General Legal Directorate, respectively, as well as Second, fractions VI and X, of the Agreement on the Assignment of Administrative Units of the Bank of Mexico and numeral 13, fraction IV, of the Policies for Public Consultation of General Provisions issued by the Bank of Mexico, has resolved to modify Annex 1, of the “Rules applicable to the report of participants to the Bank of Mexico regarding adherence to the Global Code of Conduct in the execution of foreign exchange transactions” contained in Circular 22/2017, to remain in the following terms:

RULES APPLICABLE TO THE REPORT OF PARTICIPANTS TO THE BANK OF MEXICO REGARDING ADHERENCE TO THE GLOBAL CODE OF CONDUCT IN THE EXECUTION OF FOREIGN EXCHANGE TRANSACTIONS

ANNEX 1
GLOBAL CODE OF CONDUCT

“PREAMBLE
I. What is the Global Foreign Exchange Code of Conduct?
The present set of global good practice principles in the foreign exchange market (Global Code of Conduct) has been developed in order to establish a common set of guidelines to promote the integrity and effective functioning of the wholesale foreign exchange market (Foreign Exchange Market). 1 The intention of this document is to promote a robust, fair, liquid, open and adequately transparent market, in which the diversity of Market Participants, backed by resilient infrastructures, are able to carry out their negotiations in a reliable and effective manner at competitive prices that

1
Foreign exchange market committees (CMCs) and central banks may continue to issue local standards when necessary to address specific circumstances of their markets.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 257 reflect the information available in the market, adhering to acceptable standards of conduct.
The Global Code of Conduct does not impose legal or regulatory obligations on Market Participants nor does it replace regulation, but rather intends to function as a complement to any or all local laws, rules and regulations, by identifying global good practices and processes.
The Global Code of Conduct is maintained and updated by the Global Foreign Exchange Committee (GFXC).
The GFXC was established in May 2017 as a representative forum of central banks and private sector participants to promote collaboration and communication on issues related to the foreign exchange market, exchange views on trends and developments of said market, as well as promote, maintain and update the Global Code of Conduct.
The Committee regularly evaluates particular developments of the foreign exchange market in order to determine if these justify a specific review of the Global Code of Conduct and, in those cases where it deems it appropriate, carries out a comprehensive review of the Global Code of Conduct.
More information is available at www.globalfxc.org The Global Code of Conduct is organized around six guiding principles.

Ethics: Market Participants are expected to behave in an ethical and professional manner to promote fairness and integrity of the Foreign Exchange Market.
Governance: Market Participants are expected to have a sound and effective governance framework that makes it possible to establish clear responsibilities in their activities in the Foreign Exchange Market, allows for comprehensive supervision and promotes their responsible participation in the Foreign Exchange Market.
Execution: Market Participants are expected to be careful in the negotiation and execution of transactions with the purpose of promoting a robust, fair, open, liquid and sufficiently transparent Foreign Exchange Market.
Information Exchange: Market Participants are expected to be clear and precise in their communications and protect Confidential Information in order to achieve effective communication that supports a robust, fair, open, liquid and sufficiently transparent Foreign Exchange Market.
Risk Management and Regulatory Compliance: Market Participants are expected to promote and maintain a robust control and regulatory compliance environment to identify, measure, monitor, manage and report, effectively, the risks associated with their participation in the Foreign Exchange Market.
Confirmation and Settlement Processes: Market Participants are expected to implement robust, efficient, transparent post-negotiation processes that mitigate risk, in order to promote predictable, smooth and timely settlement of Foreign Exchange Market transactions.
The Global Code of Conduct and Applicable Regulation Market Participants must be aware of and comply with the laws, rules and other regulation applicable to them and to the Foreign Exchange Market in each jurisdiction in which they conduct business (Applicable Legislation). Market Participants will continue to be responsible for having internal policies and procedures to comply with such Applicable Legislation. The content of this guide in no way substitutes or modifies the Applicable Legislation. Likewise, this guide does not represent the judgment of any regulator, supervisor or any authority, self-regulatory body with powers in the relevant markets or of Market Participants, nor does it intend to restrict their discretion, and does not grant any legal mitigation for violations of the Applicable Legislation. The purpose of this Global Code of Conduct is to serve as an essential reference for Market Participants in conducting their business in the Foreign Exchange Market, as well as in the development and review of their internal procedures. It is not intended to be a comprehensive guide for conducting transactions in the Foreign Exchange Market.

258 OFFICIAL GAZETTE Wednesday, August 24, 2022 Some of the terms used in this Global Code of Conduct may be provided or defined in a particular manner in the Applicable Legislation, which may imply certain duties or obligations in some jurisdiction. Whenever the intention of this document is to serve as a code of good practices for Market Participants operating in different jurisdictions, it is not intended that the meanings assigned to terms in any jurisdiction be applicable for the interpretation of this Global Code of Conduct. For clarity, the terms used in this Global Code of Conduct shall be understood in accordance with the meanings commonly accepted in practice in the Foreign Exchange Market without granting them specific legal or regulatory meanings.
Annex 2 contains a glossary of the terms that appear in capital letters throughout this Global Code of Conduct.
II. Who does the Global Code of Conduct apply to?
The Foreign Exchange Market comprises a diverse group of participants who intervene in the market in different ways and through various foreign exchange products. The drafting of the Global Code of Conduct takes this diversity into account and it is expected that this applies to all Market Participants in the Foreign Exchange Market, including sell-side and buy-side entities, non-bank liquidity providers, Electronic Trading Platform operators and other entities that offer negotiation, execution and settlement services. Although there cannot be a universal approach to application to all cases, given the diversity of the market, the intention of the Global Code of Conduct is to establish a common set of guidelines for responsible participation in the market. For the purposes of this document, a “Market Participant”2 is a person or organization (regardless of its legal nature) that:
(i) actively participates in the Foreign Exchange Market as part of its ordinary business and is involved in the activity of buying or selling currencies or in transactions designed to generate profits or losses based on the fluctuation of one or more exchange rates, such as derivatives, with or without deliverables, either directly or indirectly through other Market Participants; or (ii) operates a service, system, platform or organization through which participants have the ability to execute the types of transactions described in the previous subsection (i); or (iii) provides reference exchange rate execution services, and (iv) retail participants in the corresponding jurisdiction(s) are not considered as market participants. This term includes all personnel who carry out the above on behalf of a Market Participant. For clarity, in general it is considered that the following types of persons or organizations carry out activities in the Foreign Exchange Market as Market Participants, as described in subsections (i) – (iv) above:

central banks, except in cases where this interferes with the performance of their legal powers or functions related to their policy competencies; 3
supranational or quasi-sovereign entities, except in those cases where this interferes with the fulfillment of their policy mandate as an organization;
asset managers, sovereign wealth funds, hedge funds, pension funds and insurers;
a corporate treasury area or Corporate Treasury Center that conducts external transactions outside the consortium, either on its own behalf or on behalf of its holding companies, subsidiaries, branches, affiliates or joint ventures of the group it represents;

2 The term Market Participant is generally used to refer to both entities and their personnel, in accordance with the definition. However, in some cases it is clear that a principle is, by its very nature, more relevant to one or the other. For example, certain principles are primarily referred to corporate or business policies and procedures rather than individual behaviors. The terms “entity” and “personnel” are used, occasionally, in cases where the principles focus on the good practices of entities with respect to their personnel in their capacity as such and vice versa. 3 Note that the operations of central banks in compliance with their legal obligations or as part of the policy functions of their competency may be executed by the central banks themselves or through other Market Participants, including financial institutions and supranational entities, acting in their capacity as agents or in any other form, on behalf or for the account of the central bank.

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family offices that carry out treasury operations;
reference exchange rate execution providers;
non-bank liquidity providers; companies dedicated to offering automated trading strategies, including high-frequency trading strategies, as well as those that offer algorithm-based executions;
brokerage houses (brokers) (including retail Foreign Exchange Market brokerage houses), investment advisors, aggregators and intermediaries and analogous agents;
remittance transmitters, exchange houses and businesses that provide money services in their interaction with the wholesale Foreign Exchange Market;
Electronic Trading Platforms;
confirmation and settlement platforms, and
any entity classified as a Foreign Exchange Market Participant in the corresponding jurisdiction(s).
For clarity, it is considered that the following types of persons generally do not carry out foreign exchange activities as Market Participants, as described in subsections (i) – (iv) above:
price screen platforms;
remittance transmitters, exchange houses and businesses that provide money services in their interaction with retail clients;
private banking clients who conduct transactions in their capacity as natural persons or through personal investment vehicles, and
the general retail public.
The universe of Market Participants is considerably diverse in terms of the types and levels of participation in the Foreign Exchange Market. It is expected that the Global Code of Conduct applies to all these Market Participants, although the detail on how it could apply will depend on the main operations they carry out. In practice, the measures that different Market Participants adopt to align their activities with the principles of the Global Code of Conduct must necessarily reflect the size and complexity of their activities in the Foreign Exchange Market and their participation in said market, taking into account the Applicable Legislation. Ultimately, the decision on the measures that must be adopted, as well as the manner in which they do so, will depend on each Market Participant and must be the reflection of an adequate internal assessment.
Annex 3 presents a “Declaration of Commitment” format. This Declaration, like the Code, is of a voluntary nature, so Market Participants may use it in different ways to strengthen the objectives of the Code, promoting transparency, efficiency and functioning in the Foreign Exchange Market. The Declaration is accompanied by an explanatory note that provides additional background.
In addition to the Declaration, Market Participants may make use of Disclosure Cover Sheets and Templates, both for Algorithm Due Diligence and for Transaction Cost Analysis (TCA) Data Template. The aforementioned Cover Sheets have been developed as a means to improve the accessibility and clarity of existing disclosure documents and can support Market Participants in due compliance with the range of principles regarding information disclosure and transparency contained in the Code. As with the Declaration, the use of the Cover Sheets and Templates is entirely voluntary. The GFXC website – www.globalfxc.org – contains a section of guide documents on the use and publication of the Cover Sheets and Templates.” … “PRINCIPLE 4 The governing body or the person(s) responsible for the foreign exchange business strategy and the financial soundness of the Market Participant shall establish the structure and effective mechanisms that allow adequate monitoring, supervision and controls in relation to their activity in the Foreign Exchange Market.

260 OFFICIAL GAZETTE Wednesday, August 24, 2022 The governing body or the person(s) responsible for establishing the foreign exchange business strategy and the financial soundness of the Market Participant shall implement:

an operational structure with clearly defined and transparent lines of responsibility in the activities of the Market Participant in the Foreign Exchange Market;
effective supervision of the activities of the Market Participant in the Foreign Exchange Market, based on adequate information management;
an environment that promotes challenge to the senior management in charge of the daily responsibility for the foreign exchange activities of the Market Participant, and
independent control functions and mechanisms that allow evaluating whether the Market Participant carries out its activities in accordance with the requirements to mitigate operational risk and in compliance with conduct requirements. These functions must have sufficient hierarchical level, sufficient resources and access to the governing body or the person(s) responsible for the business strategy and financial soundness in foreign exchange matters of the Market Participant.
In implementing the above, the types of activities in which the Market Participant is involved must be taken into consideration, including whether the Market Participant is involved in the provision or use of Electronic Trading Activities or Brokerage Services (Prime Brokers).”
…
“PRINCIPLE 7
Market Participants must have appropriate policies and procedures to handle and respond to possible inappropriate practices and conduct effectively.
Market Participants must maintain policies and procedures supported by effective mechanisms to (i) provide confidential channels for personnel and third parties to submit reports on potential inappropriate practices or conduct and (ii) investigate and respond to such reports when appropriate.
Specifically, companies must make known to personnel and third parties where and how they can submit their reports on possible inappropriate practices and conduct (including, without limitation, illegal practices or conduct, ethical lapses or questionable conduct), in a confidential manner and without fear of retaliation.
Reports on possible inappropriate practices and conduct of the Market Participant must be investigated by independent areas or functions. Such areas or functions must have sufficient skills and experience—and the necessary resources and access—to carry out the investigation.
Market Participants must complete the investigation and determine the appropriate outcome within a reasonable time, taking into consideration the nature and complexity of the matter in question. It may be appropriate to escalate the matter within the company and report it outside of it before the investigation concludes. Reports and results must be made known to appropriate personnel within the Market Participant and, if necessary, to relevant authorities.” … “PRINCIPLE 8 Market Participants must have clear the powers with which they act. Market Participants must understand and clearly communicate their roles and functions when processing orders or executing transactions. Market Participants may have agreements or other business agreements in which the roles governing all foreign exchange transactions they carry out are defined or they may manage their relationship by determining their roles in each particular transaction. If a Market Participant wishes to modify the role with which he or his counterparty acts, such modification must be agreed upon by both parties. The Market Participant receiving an order from the Client may:
act as an Agent, executing orders on behalf and for the account of its Client, in accordance with the mandate granted and without assuming market risks in relation to the instruction, or well

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act as Principal assuming one or more risks related to an order, including credit risk and varying degrees of market risk. Principals act on their own account and have no obligation to execute the order until both parties agree. In cases where the order grants certain discretion to the Principal, this must be exercised reasonably, fairly, and in such a way that it is not designed or intended to cause harm to the Client.”

“PRINCIPLE 9
Market Participants must handle Client orders fairly and transparently, in accordance with the powers under which they act.
Market Participants are expected to handle Client orders fairly and transparently. The manner in which they do so and the applicable best practices will depend on the roles in which Market Participants are acting, as described in Principle 8 above.
Although the Currency Market has traditionally operated through the Principal figure, the Agent figure is also used. Therefore, this principle applies to both figures, as well as to Electronic Trading Platforms and Interdealer Broker Services.
ROLES
Regardless of their role, all Market Participants handling orders must:

have clear standards aimed at providing a fair and transparent outcome for the Client;
be truthful in their statements;
use clear and unambiguous language;
specify whether the prices they are providing are firm or merely indicative;
have adequate processes to allow for the rejection of Client orders for products considered inappropriate for the Client;
not conduct transactions with the intention of causing market disruption (for further guidance see Principle 12 in Execution), and
provide all relevant information to the Client prior to negotiating their orders, so that the Client can decide in an informed manner whether to execute the transaction.
Market Participants must inform their Clients of factors such as:
the manner in which orders are handled and executed, including whether they are aggregated or prioritized according to time;
the possibility that orders may be executed electronically or manually, depending on the disclosed terms;
the various factors that could affect the execution policy, which generally include positioning terms, whether the Market Participant, when managing Client orders, is assuming or not assuming the risks associated with those transactions, prevailing liquidity and market conditions, other Client orders and/or trading strategies that could affect the execution policy;
whether there is discretion or if it is expected to exist, and how it should be exercised;
the basis or reasons why requests and/or orders may be rejected; and
when possible, what the schedule policy is and if it applies, both when the order is accepted and when it is activated or executed (for further guidance see Principle 36 on Risk Management and Regulatory Compliance).
Market Participants handling Client orders in their role as Principal must:
inform the terms and conditions under which the Principal will interact with the Client, which may include:
√ that the Principal acts on its own behalf as the Client’s counterparty;

262 OFFICIAL GAZETTE Wednesday, August 24, 2022 √ the manner in which the Principal will communicate and negotiate quotation requests and indicative prices, the discussion or placement of orders, and any other relevant data that could lead to the execution of transactions; and √ the manner in which potential or existing conflicts of interest that may arise when acting as Principal or as a market maker will be identified and addressed;

clearly establish the moment when market risk might be transferred;
have activities such as market making and risk management, such as hedging transactions, in accordance with their trading strategy, positioning, assumed risk, and prevailing liquidity and market conditions, and
have internal Margin policies consistent with the guidelines set forth in this Global Code of Conduct.
Market Participants handling Client orders in their role as Agent must:
communicate to the Client the nature of their relationship;
seek to obtain the result requested by their Client;
establish a transparent order execution policy, which must provide Clients with relevant information about their order, which may include:
√ information on where the company may execute the Client’s orders; √ the factors that influenced the selection of trading platforms, and √ information on how the Agent intends to execute the Client’s orders in a timely, fair, and expeditious manner;
be transparent with their Clients regarding their terms and conditions, which must clearly establish the fees and commissions applicable during the contract term, and
share information related to accepted orders in their capacity as Agent with market makers or Principal trading desks exclusively when necessary to request a competitive quote (for further guidance see Principle 19 on Information Exchange).
Market Participants operating Electronic Trading Platforms must:
have transparent rules for users;
clearly inform any restriction or requirement applicable to the use of electronic quotes;
clearly establish the point at which market risk can be transferred;
appropriately disclose their subscription services and associated benefits, including market information (so that Clients have the opportunity to choose the best services for which they are eligible);
expressly declare – in cases where they host multiple liquidity providers – their market data policies in appropriate information disclosure documents (including regulations, guides, etc.), which must include at minimum: the level of detail of the information available, the type of users for whom it will be available, as well as the frequency and latency with which such market information will be available.
Market Participants operating anonymous Electronic Trading Platforms that offer the use of unique identifiers (“tags”) must, when applicable:
disclose appropriate information to all users regarding which specific counterparty information is provided through said tags, and to whom such information is provided;
disclose appropriate information to all users indicating at which point in a transaction the tag assigned to a user is provided to their counterparty;
have information disclosure documents (including regulations, guides, etc.) containing clear policies related to the manner in which tags are assigned and administered, including policies related to the re-tagging procedure;

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maintain audit records for all tag assignments and for those cases of re-tagging.
Market Participants acting as Interdealer Broker Services must:
meet expectations similar to those described above for Market Participants handling Client orders in their role as Agents;
Interdealer Broker Services may operate via voice, as Voice Brokerage Services, or may operate partially or entirely via electronic means. Those with an electronic component will also be considered Electronic Trading Platforms and, therefore, must meet the expectations of right described for Market Participants operating Electronic Trading Platforms. Market Participants acting as Clients must:
be aware of the responsibilities they should expect from others, as mentioned previously;
be aware of the risks associated with the transactions they request and take, and
periodically evaluate the execution of received orders.”

“PRINCIPLE 10
Market Participants must process orders transparently, fairly, and in accordance with the relevant characteristics applicable to different types of orders.
Market Participants must be aware that different types of orders may have different characteristics for execution. For example:
Market Participants executing Stop Loss Type Orders must:

obtain from the Client the necessary information to define the terms of the Stop Loss Type Order, such as reference price, amount, duration, and trigger of the orders, and;
reveal to Clients whether risk management transactions may be executed near the level established for the execution of the Stop Loss Type Order and that those transactions may impact the reference price and result in the triggering of the Stop Loss Type Order.
Examples of unacceptable practices:
negotiating or acting with the purpose of moving the market to the Stop Loss level, and
offering Stop Loss Type Orders, which are based on the deliberate formation of losses.
Market Participants filling a Client order, even partially, must:
act fairly and reasonably in accordance with prevailing market circumstances, as well as any other factor revealed to the Client, when determining whether and how to fill the Client’s order, paying attention to other relevant policies;
decide whether and how to fill a Client order, including partially, and communicate that decision to the Client as soon as possible, and
fill Client orders in full within the parameters specified by the latter, subject to factors such as the need to prioritize among Client orders and the availability of any credit line that the Market Participant may grant to the Client at that time.
Market Participants handling Client orders to trade at a particular reference price (Fixing Orders) must:
understand the associated risks and know the applicable procedures;
refrain from sharing information inappropriately, whether through collusion or otherwise, or attempting to influence the exchange rate;

264 OFFICIAL GAZETTE Wednesday, August 24, 2022

refrain from intentionally influencing the reference exchange rate to benefit directly or through Client flows that have the exchange rate as the underlying of their transactions with them, and
behave in accordance with what is established in the Recommendations of the Report on Reference Exchange Rates by the Financial Stability Board, 4 which include, and are not limited to, among others:
√ pricing transactions transparently and consistently with the risk inherent in accepting such transactions, and √ establishing and enforcing internal procedures and guidelines to collect and execute Fixing Orders.
Indicative examples of acceptable practices:
negotiating an order before, during, or after the close of the reference exchange rate calculation window, provided it is not done in a manner that intentionally generates a negative impact on the market price and the Client’s outcome.
aggregating all Client interests and executing the net amount;
Indicative examples of unacceptable practices:
buying or selling an amount greater than the Client’s interest seconds prior to the close of the reference exchange rate calculation period with the intention of increasing or decreasing its price to the detriment of the Client;
buying or selling an amount shortly before the reference exchange rate calculation period in such a way that there is an intention to negatively impact the market price and the Client’s outcome;
showing large interest in the market during the reference exchange rate calculation period with the intention of manipulating said price to the detriment of the Client;
reporting specific Client transactions to the reference price to persons other than,
acting with other Market Participants to increase or decrease the reference exchange rate to the detriment of a Client’s interests (for further guidance see Principles 19 and 20 on Information Exchange.)
Finally, Market Participants processing orders that potentially may have relevant impacts on the market must do so with particular care and attention. For example, certain transactions, such as mergers and acquisitions, could have a relevant impact on the market.”

“PRINCIPLE 11
The Market Participant shall only conduct Pre-Hedging with respect to their Clients’ orders when acting as Principal and must do so fairly and transparently.
Pre-Hedging is the management of risk associated with anticipated Client orders designed to benefit the Client in relation to such orders and any resulting transactions.
Market Participants may conduct Pre-Hedging for such purposes and in a manner that does not intend to harm the Client or affect the market. Market Participants must inform their Clients of their Pre-Hedging policies so that Clients understand their options regarding execution.

When evaluating whether Pre-Hedging is being conducted in accordance with the principles mentioned above, the Market Participant must consider prevailing market conditions (such as liquidity) and the size and nature of the anticipated transaction.
While conducting Pre-Hedging, the Market Participant may continue with its transactions, including risk management, market making, and the execution of other Clients’ orders. To determine if Pre-Hedging is applied in compliance with the aforementioned principles, the Pre-Hedging of a single transaction must be considered within a portfolio of transactions that takes into account the Market Participant’s global exposure.
In cases where the Market Participant is acting as an Agent, it must refrain from conducting Pre-Hedging.
See Annex 1 for a set of examples related to Pre-Hedging.”

…

“PRINCIPLE 18
Market Participants providing algorithm-based trading or aggregation services to their Clients must provide them with adequate information on how they operate.
Market Participants may provide algorithm-based trading services that use computer programs applying algorithms to determine various aspects, including price and quantity of orders.
Market Participants may also provide their Clients with aggregation services, services that provide access to multiple liquidity sources or trading platforms and which may include routing the order to those sources or locations.
Market Participants providing algorithm-based trading services or aggregation services to their Clients must inform the following:

a clear description of the algorithm-based execution strategy or aggregation strategy, as well as sufficient information for the Client to evaluate the performance of the service, in compliance with the protection of Confidential Information;
whether the algorithm provider or aggregation service provider may act as Principal in the execution;
the costs applicable for the provision of the services;
in the case of algorithm-based trading services, general information on how routing preferences will be determined, and
in the case of aggregation services, information on the liquidity sources to which they may have access.
Market Participants providing algorithm-based trading services or aggregation services must disclose any conflict of interest that may impact the handling of any Client’s order (for example, those deriving from interaction with their own liquidity, or those having particular commercial interests in trading platforms, or in other relevant service providers), as well as the manner in which such conflicts will be addressed. Market Participants providing algorithm-based trading services to Clients are encouraged to disclose relevant information in a standardized format widely accepted in the market – for example, aligning with the structure of the Global Foreign Exchange Committee (GFXC) FX Algo Due Diligence Template, in those cases where appropriate. This is to allow Clients to compare and understand the provided services more easily. Such information disclosure must be easily accessible, both for current and potential Clients – for example, by sharing it bilaterally, or by making it available to the public on the provider’s website. Market Participants providing algorithm-based trading services to Clients are encouraged to disclose relevant information that will be used for the purpose of conducting Transaction Cost Analysis (TCA), in a standardized format widely accepted in the market – for example, by using the Global Foreign Exchange Committee’s (GFXC) Transaction Cost Analysis Data Template. Furthermore, additional information must be provided in cases where it is considered useful. Clients of algorithm-based trading providers must use this information and disclosed information to continuously evaluate how appropriate the trading strategy is in relation to their execution strategy.

4 See Final Report of the Financial Stability Committee on Reference Exchange Rates, dated September 30, 2014.

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Clients who use an aggregator to access trading markets must know the parameters according to which the prices displayed by the aggregator are determined.
Market Participants who offer algorithmic trading services or aggregation services must perform their services in accordance with the terms informed to the Client.”
…

“PRINCIPLE 19
Market Participants must clearly and effectively identify Confidential Information and adequately limit access to it.
Market Participants must identify Confidential Information. Confidential Information includes the following information that is not in the public domain and that is received or developed by a Market Participant:
(i) Foreign Exchange Market Operations Information. It may refer to different types of information including that relating to past, present, and future activities, or to the own positions of Market Participants or their Clients, as well as that related information of a sensitive nature that is received or produced in the course of such activity. Some examples of this information are, among others, the following:
√ details of the Market Participant’s order book; √ other Market Participant Interests:
√ spread matrices offered by Market Participants to their Clients, and √ orders to obtain benchmark fix rates.
(ii) Information Designated as Confidential. Market Participants may agree to a higher standard of secrecy regarding Confidential Information, proprietary, exclusive use, and any other information, which may be formalized through the signing of non-disclosure or similar confidentiality agreements.
The identification of Confidential Information must be in accordance with the legal and contractual restrictions applicable to the Market Participant.
Market Participants must limit access to and protect Confidential Information.

Market Participants must not disclose Confidential Information except to those internal or external parties that have a valid justification for receiving such information, such as risk management, legal requirements, or regulatory compliance needs.
Under no circumstances must Market Participants disseminate Confidential Information to internal or external parties where it is considered that they could misuse it.
Confidential Information obtained from a Client, a potential Client, or a third party, must only be used for the specific purpose for which it was provided, except as mentioned above or as agreed with the Client.
Market Participants must disclose, at a high level, the manner in which Confidential Information, with respect to Foreign Exchange Market Operations Information, is shared internally in accordance with this Principle.
Market Participants acting as Prime Brokers must have an adequate level of segregation between their brokerage activities and other operations they carry out.
√ In order to avoid potential conflicts of interest, the Prime Broker service must establish appropriate information barriers.
√ Prime Broker services must be transparent about the standards they require and adopt.
Trading platform operators that offer tags must ensure that the practice of “re-tagging” is appropriate for that purpose and that, in those cases where one of the parties had previously requested to avoid another in particular, this practice is not used to facilitate the transaction between said participants.”
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“PRINCIPLE 22

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Market Participants must communicate Market Color appropriately and without compromising Confidential Information.
The timely dissemination of Market Color among Market Participants can contribute to an efficient, open, and transparent Foreign Exchange Market through the exchange of information on general market conditions, different viewpoints, and aggregated and anonymous information flow.
Companies must provide clear guidelines to their personnel on the appropriate way to share Market Color. In particular, communications must be restricted to information that is effectively aggregated and anonymous.
For these purposes:

communications must not include specific Client names, nor other mechanisms that reveal the identity of a Client or patterns of behavior externally (for example, code names that implicitly link the activity with a particular Market Participant), nor specific information of any individual Client;
references to groups of Clients, locations, and strategies must be general enough so that Market Participants cannot infer the corresponding Confidential Information;
communications must be limited to sharing viewpoints on the market and levels of conviction and must not disclose information on individual foreign exchange positions;
flows must only be disclosed by price range and not by exact exchange rates related to a specific Client or flow, and references to volumes, other than foreign exchange transactions already reported publicly, must be referred to in general terms;
the interest in options that has not been publicly reported should only be discussed in terms of generally observed structures and thematic interest;
references to execution times must be general, unless the transaction information can be widely observed;
Market Participants must be careful when providing information to their Clients regarding the status of their orders (including aggregated and anonymous Fixing Orders) to protect the interests of other Market Participants related to the information (which is particularly true when there are multiple orders, at the same level or very close to each other);
Market Participants must not request Confidential Information when providing or receiving Market Color;
trading platform operators that offer the use of tags must only disclose user information (color), as clearly established in their information disclosure documents (including regulations, guides, among others), and
if feasible, anonymous trading platforms must make an effort to make available to users information related to adherence to the Declaration of Commitment of the current version of the Global Code of Conduct of some counterparty, current or potential, of a particular transaction 5.
See Annex 1 for a set of examples of Market Color communications.”
…

“PRINCIPLE 27

Market Participants must have practices to limit, monitor, and control risks associated with their operational activity in the Foreign Exchange Market.
These practices may include, without limitation:

5 The responsibility for transmitting accurate and up-to-date information regarding the status of adherence to the Declaration of Commitment to the Global Code of Conduct rests entirely with the platform user. On the other hand, the platform will only be responsible for safeguarding and reporting such information in the manner in which it had been presented by the user and will make no statement regarding the user’s conduct. In the event of changes to the status of adherence to the Declaration of Commitment to the Global Code of Conduct by the user, the obligation to update the referenced information to the platform rests with the latter.

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Regularly monitor operational activities, including, when appropriate, the internal identification and reporting of failed, cancelled, or erroneous trades.
Automated or manual monitoring systems to detect actual or potential misconduct and market manipulation. Relevant personnel must be qualified to detect trading patterns that may indicate unfair or manipulative practices. Market Participants may use certain statistics or metrics to detect behaviors that require additional review, such as out-of-market rates, repetitive orders, and unusually small or large orders. There must be appropriate processes that allow for the timely review and reporting of these suspicious practices to senior management levels within the organization when appropriate.
Verification of valuations used for risk management and accounting purposes, performed by personnel independent of the business area that incurs the risk.
Periodic and timely submission of independent reports of risk positions and profit/loss statements of traders to the risk management area or senior management, as appropriate, including a review of considerable deviations in losses/profits relative to expected levels.
Timely and accurate capture of trades in order to calculate risk exposures accurately and timely for monitoring purposes (see Principle 36).
Periodic reconciliations of front-office, middle-office, and back-office systems, with identified discrepancies and their resolution monitored by personnel independent of the business unit.
Timely reporting to the governing body responsible for administration or individual(s) when risk limits are exceeded, including corrective actions to return exposures to their limits, as well as the adoption of any measures to prevent recurrence.
Appropriate controls for the proper sending of orders or quotes, such as moderators, reducers, or automatic electronic order switches (kill switches or throttles).
These controls must be designed to prevent the entry or transmission of erroneous orders or quotes that exceed the predefined size, price parameters, and financial exposure thresholds.
Market Participants must be aware of the risks of relying on a single source of liquidity and must incorporate contingency plans when appropriate.”
…

“PRINCIPLE 29

Market Participants must have adequate procedures to manage their credit risk exposure to counterparties, including, when appropriate, the use of netting and collateral provision agreements, such as master netting agreements and credit support agreements.
The use of master netting agreements and credit support agreements contributes to strengthening the functioning of the Foreign Exchange Market. Other measures to manage counterparty credit risk include the accurate and timely assessment of the credit quality of counterparties prior to entering into each transaction, sufficient diversification of counterparty exposure when appropriate, the timely determination and monitoring of counterparty exposure limits, as well as the acceptance of transactions only when they are within previously approved limits. Credit limits must be determined independently of the front-office and must reflect the risk appetite established by the Market Participant. Market Participants must maintain accurate records in relevant relationships with their counterparties. This may include records of conversations and written correspondence, while the policies for retaining such records must be in accordance with Applicable Legislation. Electronic Trading Platforms that have multiple liquidity providers and consumers must, at a minimum, disclose the following information regarding credit monitoring:

what mechanisms and/or controls exist to establish, modify, and monitor all applicable credit limits;

Wednesday, August 24, 2022 OFFICIAL GAZETTE 269

the cases in which the responsibility for monitoring breaches of credit limits will fall on the platform, or on the users and who will be responsible for resolving cases of breach of credit limits; and
what methodologies will be used, specifically, to calculate credit exposures (such as the Net Open Position, NOP, in English, among others).”
…

“PRINCIPLE 32

Market Participants must establish adequate processes to identify and manage operational risks that may arise from human errors, system failures, or inadequate processes or external events.
Market Participants must take into consideration operational risks generated by a global cross-border environment, such as different time zones or differences in uses and practices accepted by the industry. Operational risks may include those arising from human errors, malicious conduct, system failures, or unforeseen external circumstances. Market Participants must adopt strict security measures to address the vulnerability of operational areas and infrastructure to potential operational disruptions, terrorism, or sabotage. Access to operational areas must be controlled with established procedures that specify time restrictions, security controls, and access authorizations issued by appropriate management instances, when appropriate, for external visitors to operational areas or external visitors.”

“PRINCIPLE 33

Market Participants must have Business Continuity Plans (BCPs) appropriate to the nature, size, and complexity of their foreign exchange business, and that can be implemented promptly and effectively in the event of large-scale disasters, loss of access to significant trading platforms, settlement services, as well as other critical services, or other market disruptions. Operational continuity plans may include, among others, the following elements:

Contingency plans to support business continuity through the Foreign Exchange Market, including plans related to the storage and use of information and, as applicable, procedures in case benchmark exchange rates are not available;
Periodic review, update, and testing of contingency plans, including drills so that executive officials and relevant personnel are familiar with contingency measures. This must include periodic reviews of potential scenarios that might require the activation of such plans;
Disaster recovery plans that identify essential operating systems and support procedures. All critical automated processes determined by the Market Participant must have documented, in an automated and/or manual manner, their contingency procedures;
The identification of external dependencies, including a proper understanding of the continuity plans of settlement system operators, and other critical infrastructure and service providers, as well as the inclusion of said plans, or other support processes, in the Market Participant’s own continuity plans;
Emergency contact information for internal or external dependencies. Communication means must be secure, and
Alternate operational sites from which relevant personnel, systems, and operations can be accommodated and that must receive maintenance and be subject to periodic testing.”
…

“PRINCIPLE 34

Market Participants must have procedures to resolve likely adverse outcomes derived from the use or dependence on technological systems (hardware and software).

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Market Participants must have operating processes to clearly assign ownership of each system they depend on and any changes to these must be approved in accordance with internal policies. All systems must be fully tested before being used within the production environment, preserving evidence for audit of all actions taken and available for review. This must be applicable for the development, testing, implementation, and subsequent updates of operating systems, as well as algorithms. Additionally, Market Participants must also be aware of the existence of broader risks that may exist and affect their activity in the Foreign Exchange Market, such as risks related to cybersecurity. Market Participants operating through Electronic Trading Platforms must monitor the intraday operational health of the platform (for example, utilization capacity) and must perform periodic capacity tests of critical systems to determine the system’s capacity to process trades accurately, timely, and robustly. Market Participants participating in electronic transactions must establish appropriate and proportional controls to reduce and mitigate the possibility of generating or acting on electronic quotes that may result in erroneous transactions or market disruptions such as out-of-market quotes or trades, typographical errors, unintentional or uncontrolled operational activity arising from technological failures, defects in trading logic, and unexpected or extreme market conditions. Market Participants must not generate or attempt to act deliberately on quotes above the recipient’s technical capabilities or against established protocols. Excessive frequency of messages that may approach or exceed the limits and capacities of the platform must be controlled, for example, through the application of logic using moderators, reducers, or automatic switches (throttling) and/or circuit breakers. The identification of any platform failure or characteristic that may jeopardize its continuous operation must be reported, appropriately, to senior management levels within the organization. The inclusion of third parties in the electronic flow between those participants who generate and act on quotes does not extinguish the legal or contractual obligations of any of the parties. Market Participants such as aggregators and interbank platforms that may carry out both the distribution and use functions of electronic quotes must comply with all relevant principles.” …

“PRINCIPLE 35

Market Participants must reduce their Settlement Risk to the extent possible. This includes the settlement of foreign exchange transactions through services that provide payment versus payment (PVP) settlement, when this form of settlement is available.
When applicable, Market Participants must eliminate Settlement Risk by using settlement services that provide payment versus payment (PVP). In those cases where PVP settlement is not used, Market Participants must reduce the size and duration of their Settlement Risk to the extent possible. Netting of foreign exchange settlement obligations (including through the use of automated netting systems on settlement) is encouraged. In those cases where, the settlement of obligations process is carried out on a netting basis by Market Participants, said process must be adequately evidenced by appropriate documentation. The aforementioned netting obligation may be bilateral or multilateral. The head of each area involved in the foreign exchange operations of a participant must have, at least, a high-level understanding of the settlement process and the tools that can be used to mitigate Settlement Risk, including, when available, the use of PVP settlement. Market Participants must consider creating internal incentives and mechanisms to reduce those risks associated with foreign exchange settlement. If the choice of settlement method by a counterparty prevents a Market Participant from reducing its Settlement Risk (for example, if a counterparty does not participate in PVP settlement mechanisms, or does not agree to use netting of its obligations), then the Market Participant must consider reducing its exposure limit to said counterparty. This is in order to create incentives for the counterparty in question to modify its foreign exchange transaction settlement methods, or to adopt other appropriate risk mitigation actions.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 271 Also see the Confirmation and Settlement section for more details on this topic.

...

“PRINCIPLE 36
Market Participants must keep timely, consistent, and accurate records of their market activity to facilitate appropriate levels of transparency and audit, and must have processes to prevent the execution of unauthorized transactions.

Market Participants must maintain accurate and timely records of orders and transactions that have been accepted and activated/executed, as well as the basis or reasons behind each electronic transaction request and its rejection, in accordance with what is provided under Principle 9. This is to create effective audit records for review purposes, as well as to provide transparency to their Clients when appropriate.

This record may include, among other things: date and time, product type, order type (for example, Stop Loss Orders; or an order where the price is subject to last look practice), quantity, price, operator, and Client identity. Market Participants must apply timestamps that are sufficiently granular and consistent so as to allow recording the moment the instruction is accepted and when it is activated/executed.

Market Participants must have established processes to support the proper storage of relevant information, as well as the preservation of its details.

Information must be provided to the Client who so requests in order to provide sufficient transparency regarding their orders and transactions, as well as to facilitate informed decision-making regarding their market interactions. The information may also be used to resolve operational disputes. Records must allow Market Participants to effectively monitor their own compliance with internal policies, as well as their adherence to appropriate conduct standards adopted by the market.

Market Participants must establish guidelines specifying authorized personnel to conduct transactions after hours, or outside their facilities, as well as the limits and types of transactions permitted. Likewise, an expedited reporting system must be developed and appropriate records must be kept.”

“PRINCIPLE 37
Market Participants must conduct “Know Your Client” (KYC) reviews to ensure that their counterparties’ transactions are not being used to facilitate money laundering, terrorist financing, or other criminal activities.

Market Participants must adopt measures to reinforce the “Know Your Client” principle (see Principle 52 in the Confirmation and Settlement section).

Market Participants must have internal processes to facilitate the expedited reporting of suspicious activities (for example, to the compliance officer or competent authorities, if necessary). Relevant personnel must receive effective training, in order to generate awareness of the seriousness of these activities, as well as their obligation to report suspicious activities, without revealing their suspicions to the entity or individual suspected. The aforementioned training must be updated regularly to keep pace with the changing methods adopted by money launderers.”

...

“PRINCIPLE 41
Prime Brokerage Participants must strive to monitor and control trading permissions and real-time credit provisions at all stages of transaction execution, in accordance with their market activity profile, in order to reduce the risk for all parties involved.

Prime Brokerage Participants must strive to develop and/or implement robust control systems that include the allocation, monitoring, modification, and/or termination of credit limits and permissions granted in a timely manner. Likewise, they must properly manage the risks associated with them.

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Prime Brokerage Clients must strive to have real-time monitoring of their available credit lines and permitted types of transactions, so that only transactions within permitted parameters are executed;
Executing dealers must strive to have real-time monitoring of the designation of limits in order to validate transaction execution requests prior to execution, and
Prime Brokers must have reasonably designed systems to monitor transaction execution activity, as well as the limits applicable when receiving an instruction for a Give-Up Trade transfer from one brokerage firm to another.

Prime Brokers must be able to accept transactions in accordance with the terms and conditions established in Prime Brokerage agreements and notifications of designation.

Prime Brokers must have policies and procedures reasonably designed to handle exceptions to limits, changes or modifications to established limits, as well as novations.

Prime Brokers must clearly disclose to their Clients how they monitor their credit limits and handle breaches of said limits.”

...

“PRINCIPLE 50
Market Participants must adequately measure, monitor, and control their Settlement Risk in a manner equivalent to other counterparty credit exposures of similar size and duration.

In cases where Payment versus Payment (PVP) is not used, Settlement Risk must be adequately measured, monitored, and controlled. Market Participants must establish mandatory ex ante limits and use controls equivalent to those used for other credit exposures of similar size and duration for the same counterparty. When it is decided to allow a Client to exceed a limit, appropriate internal approval must be obtained.

When settlement amounts are offset by netting, the initial confirmation of the transactions to be netted must be carried out in a similar manner to how it would be done for any other foreign exchange transaction. All initial transactions must be confirmed before being included in netting calculations. In the case of bilateral netting, the procedures for netting the settlement values used by Market Participants must also include a procedure to confirm the bilateral net amounts for each currency, obtained at a certain time of day or cut-off point, previously agreed upon with the corresponding counterparty.

To avoid underestimating the size and duration of exposures, Market Participants must recognize that exposure to their counterparty’s Settlement Risk begins at the moment a payment order for the currency they sold cannot be revoked or cancelled with certainty, which may occur prior to the agreed settlement date. Market Participants must also recognize that some funds may not be received until it has been confirmed that the transaction has been definitively settled during the reconciliation process.”

“PRINCIPLE 51
Market Participants must use Standing Settlement Instructions (SSI)

Whenever possible, SSI must be implemented for all products and currencies traded with those counterparties with which Market Participants maintain a business relationship. The responsibility for entering, authenticating, and providing maintenance of the SSI must be held by employees who are clearly segregated from personnel responsible for sales and transaction execution, and ideally, also from operational personnel responsible for transaction settlement.

SSI must be stored securely and be available for use with all settlement systems to facilitate direct processing. The use of multiple SSI with the same counterparty for the same product type and currency is not recommended.

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counterparty for the same product type and currency. Due to the Settlement Risk implied by the use of multiple SSI with the same counterparty for the same product type and currency, it must be subject to adequate controls.

SSI must be configured with a specific start date, and the records of entry and their modifications (including audit records) must have the pertinent approvals, such as review by at least two people. Counterparties must be notified of any changes to the SSI with sufficient advance notice before implementation. Any change, notification, as well as any new SSI, must be sent, whenever possible, through authenticated and standardized messages.

All transactions must be settled in accordance with the SSI in effect on the value date of the transaction in question. Transactions pending settlement at the time the SSI have been modified (and whose value date coincides with, or is after, the start date for the new SSI) must be reconfirmed before carrying out the corresponding settlement (either bilaterally or through the transmission of authenticated messages).

In cases where SSI are not available (or existing SSI are not appropriate for a particular foreign exchange transaction), alternative settlement instructions to be used must be delivered as soon as possible. Such instructions must be exchanged through an authenticated message, or by other secure means, and verified subsequently as part of the transaction confirmation process.”

...

“PRINCIPLE 53
Market Participants must have adequate systems that allow them to project, supervise, and manage their intraday and end-of-day funding requirements, in order to reduce possible complications during settlement processes.

Market Participants must properly manage their funding needs and ensure they are able to meet their foreign exchange payment obligations on time. Failure by a Market Participant to meet their foreign exchange payment obligations on time could, in turn, prevent one or more counterparties from completing their own settlement processes, and generally lead to liquidity disruptions and alterations in payment and settlement systems.

Market Participants must have clear procedures describing how each account they use to settle foreign exchange transactions will be funded. Whenever possible, Market Participants who have accounts denominated in foreign currencies in other institutions (also known as “nostro” accounts) must calculate the balance of said accounts in real time, including all transactions, cancellations, and modifications for each term (value date). This is in order to reduce the risk of overdraft of the aforementioned “nostro” accounts.

Market Participants must send payment instructions as soon as possible, taking into account different time zones, as well as cut-off times for receiving instructions set by their correspondents. Market Participants must inform about expected receipts (whenever possible, through standardized messages), so that banks where they hold foreign currency-denominated accounts (known as “nostro banks”) can identify and correct payment errors in a timely manner, as well as help in formulating procedures to properly inform higher hierarchical levels within the organization.

Market Participants must communicate with their “nostro banks” to process cancellations and modifications of payment instructions. Market Participants must clearly differentiate between cases where they can cancel or modify payment instructions unilaterally, and those other cases where they must negotiate with their “nostro banks” in order to make cut-off times as close as possible to the start of the settlement cycle for the relevant currencies.”

...

“ANNEX 1
Examples

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The examples presented in the Global Code of Conduct are intended to clarify the principles and show the situations in which the principles may apply. The examples are complex and do not seek to be precise rules or prescriptive or exhaustive guidelines, nor should they be understood or interpreted as such. Nor is it intended that the examples grant exceptions or be an exhaustive list of situations that may arise. In fact, it is expressly recognized that facts and circumstances may and will vary. In some examples, specific market roles are used to provide a more realistic example; however, the conduct exemplified applies to all Market Participants.

The examples are grouped in accordance with the guiding principles and in terms of the principle being exemplified. Notwithstanding the foregoing, in several cases, the example may be applied to various guiding principles. Examples marked with “x” show behaviors that should be avoided; examples marked with “✓” indicate behaviors that the Global Code of Conduct seeks to foster and reinforce. It is intended to update this Annex as the Foreign Exchange Market evolves.

Similarly to other sections of the Global Code of Conduct, Market Participants must interpret these examples in a professional and responsible manner. Market Participants are expected to use their good judgment and act in an ethical and professional manner.

EXECUTION
Market Participants must have clear the roles with which they act. (PRINCIPLE 8) ✓ A Client requests a Market Participant to buy EUR/NOK on their behalf in the market. The Market Participant and the Client have an agreement in which it is established that the former will act as an Agent and will add their fees. The Market Participant executes the order in the market, showing the execution analysis and adding the fee.

Market Participants must have clear the roles with which they act. In this example, the parties had specified in advance the roles with which they would act and that the Market Participant would add the fee cost. Specifically, the Market Participant executes the Client’s request in their capacity as agent and is transparent about the nature of the execution and the associated cost.

✓ A Client requests a Market Participant to buy EUR/NOK as a Market Order. The Market Participant and the Client have a relationship through the Principal figure stipulated in their terms and conditions. The Market Participant fills the Client’s order in accordance with the agreed terms, possibly using their own inventory and liquidity available in the market.

Market Participants must have clear the roles with which they act. In this example, the parties have clearly specified, in advance, the roles with which they act, disclosing in advance the terms and conditions under which the Market Participant will interact with the Client. Specifically, the Market Participant and the Client, acting as Principals, agreed to execute the transaction.

Market Participants must handle Client orders fairly and transparently. (PRINCIPLES 9 AND 10) ✓ A bank receives a large order from a fund (Client) to sell EUR/PLN at the reference rate (fix) of 4 p.m. London time zone. In accordance with the agreed terms and conditions, the bank will act as Principal and may hedge foreign exchange transactions depending on market conditions. The bank hedges part of the ordered amounts before the time window for determining the reference rate (fixing window), as it estimates that the duration of the referred five-minute period is too short to settle the total amount of the transaction without affecting the market rate to the detriment of the Client. The bank also retains part of the risk in its book and does not trade the total amount of the order in the market, thereby reducing the impact on the market from the Client’s order on the reference rate, with the intention of benefiting the Client.

Market Participants are expected to administer orders with fairness and transparency. In this example, the Client and the bank agreed that the latter would act as Principal. The bank executes the transaction in a way that benefits the Client by reducing the impact of the Client’s order on the market.

X A Market Participant has several orders from various Clients to buy USD/ZAR. The Market Participant has informed its Clients about its electronic order processing policy in the order in which it receives them from its Clients. The Market Participant executes another client’s order first despite having received it after other orders.

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Market Participants must make their Clients aware of the factors that affect the way orders are handled and executed, including whether orders are aggregated or prioritized according to schedule, and must have clear standards established that seek to provide a fair and transparent outcome for the Client. In this example, the Market Participant has made the Client aware of its order processing policy, although it violates said policy when executing orders in a non-sequential manner.

X A Client calls a Market Participant to execute a series of foreign exchange transactions, mentioning that these are carried out under the agency contract they have entered into. The agency contract includes a previously negotiated fee. When executing the transactions, the Market Participant's execution desk adds an undisclosed additional differential for each transaction it executes, causing the Client to pay an additional amount over the previously negotiated fee.

A Market Participant that handles Client orders in its role as Agent must be transparent with its Clients regarding its terms and conditions, which must clearly establish costs for fees and commissions. In this example, the Market Participant charges a fee in excess of what was previously negotiated and does not make it known to the Client.

X Operator A tells Voice Brokerage Service B that it has a large amount to execute at a reference exchange rate (fix) and needs help to establish a favorable rate for its benefit. Voice Brokerage Service B informs Operator C, who has a similar order, and all agree to combine their orders to create a greater impact during or prior to the window for determining the reference exchange rate (fix).

Market Participants must handle orders in a fair and transparent manner, must not reveal operational information related to Clients (Principle 19), and must behave in an ethical and professional manner (Principles 1 and 2). Collusion to intentionally influence the reference exchange rate (fix), illustrated in this example, is neither ethical nor professional. The disclosure of information regarding a Client's transactions to external parties is non-competitive conduct that undermines the fair and effective functioning of the Foreign Exchange Market.

✓ A corporate treasury contacts a bank to buy a large amount of GBP/SEK at the 11:00 a.m. reference exchange rate (fix), New York time zone. The Client and the bank agree that the latter will act as Principal and may hedge the transaction. Considering that liquidity around 11:00 a.m. is not sufficient to absorb the order, the bank begins buying small amounts of GBP/SEK during the morning to limit the market impact of the transaction. The bank fills the Client's order at 11:00 a.m. at the reference exchange rate (fix), using its inventory.

Market Participants must handle Client orders in a fair and transparent manner. In this example, the Market Participant strives to achieve a fair outcome for its Client.

X A Client instructs a Market Participant to buy 5 billion USD/JPY at the 4 p.m. reference exchange rate (fix) as part of a cross-border merger and acquisition transaction. After receiving the instruction, but before 4 p.m., the Market Participant buys 300 million USD/JPY for its own book and not as part of a risk management strategy for the transaction. After the determination of the reference exchange rate (fix) at 4 p.m., the Market Participant sells 300 million USD/JPY for its own book, solely to take advantage of the price movement caused by the Client's order.

Market Participants must handle Client orders in a fair and transparent manner, and Confidential Information obtained from a Client may only be used for the specific purpose for which it was provided. In this example, the Market Participant uses its knowledge of the Client's order and the expected market impact of the Fixing Order to obtain profits, potentially harming and putting the Client at a disadvantage.

✓ A bank is anticipating an order related to a probable merger and acquisition transaction on behalf of a Client involving the sale of a large amount of a specific currency. The bank recognizes that this transaction may have a considerable impact on the market and, therefore, proactively involves the Client in discussing a potential execution strategy, including but not limited to, internal flow reconciliation, execution timing, use of algorithms, and use of Pre-Hedging. The bank hedges in anticipation of the order with the Client's consent and with the intention of managing the risk associated with the anticipated transaction and seeking to obtain a better outcome for the Client.

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Market Participants that handle orders that by their size could potentially have relevant impacts on the market must do so with particular attention and care. The order described in this example is large and may have a relevant impact on the market, so the parties involved take various steps to supervise and execute it appropriately.

Market Participants may only perform Pre-Hedging when acting as Principal and must do so in a fair and transparent manner. (PRINCIPLE 11)

✓ A Market Participant has revealed to a Client acting as Principal that it may perform Pre-Hedging on the Client's anticipated orders. The Client requests the Market Participant for a buy position for a large amount of USD/CAD during a period of the day with illiquidity. Due to liquidity conditions and the size of the anticipated order, the Market Participant expects it will have to quote a significantly lower buy price than what is shown on the screen of the Interdealer Brokerage Service (Interdealer Broker, IDB). However, before determining its quote, and for the purpose of improving its price to the Client, the Market Participant tests market liquidity by selling a small amount through the Interdealer Brokerage Service (IDB). The Market Participant quotes the Client a buy price for the total amount, taking into consideration, for the Client's benefit, the amount already sold.

Market Participants may only perform Pre-Hedging to cover anticipated orders of their Client when acting as Principals and without the intention of creating a disadvantage for the Client. In this example, the Market Participant has performed Pre-Hedging on part of the order to manage the potential risk associated with the anticipated order and to benefit the Client, specifically by taking into consideration the price benefit of the amount covered through Pre-Hedging for the Client.

X A Client requests a bank for a buy position for 75 million USD/JPY. The bank has revealed to its Client that it acts as Principal and may perform Pre-Hedging of the Client's anticipated orders. The bank then sells 150 million USD/JPY in the market outside its ordinary operations and before addressing the requested buy position, with the intention of taking advantage of the information from the Client's request and benefiting from a potentially lower market price.

Pre-Hedging is intended to manage the risk associated with Clients' anticipated orders, designed to benefit the Client. Market Participants should only perform Pre-Hedging with Client orders when acting as Principal. In this example, the amount intentionally sold by the bank as part of the Pre-Hedging was not proportional to the risk inherent in the anticipated transaction and was not designed to benefit the Client. The bank acted with the intention of taking advantage of the Client's transaction request for its own benefit and potentially puts the Client at a disadvantage. A Market Participant must also consider the prevailing market conditions and the size and nature of the anticipated transaction when evaluating whether to perform Pre-Hedging regarding said transaction.

Market Participants must not solicit transactions, create orders, or provide prices with the intention of creating a disruption in the functioning of the market or impeding price discovery. (PRINCIPLE 12)

X A Market Participant wishes to sell a large amount of USD/MXN. Before doing so, the Market Participant executes a number of successive small purchases of USD/MXN on a widely consulted Electronic Trading Platform with the intention of increasing the market price and inducing other Market Participants to buy USD. Subsequently, the Market Participant executes the original sell order on one or more Electronic Trading Platforms at a higher price.

Market Participants must not solicit transactions or create orders with the intention of causing a disruption in the functioning of the market or impeding the price discovery process, including actions aimed at giving a false impression of the market price, depth, or liquidity. This example illustrates a strategy aimed at causing artificial price movements. While Market Participants generally split large transactions to mitigate the impact of a transaction, in this case, the small transactions are carried out with the intention of provoking an artificial price movement. The Market Participant plans to sell a large amount of currency but performs small buy operations to create a false impression in the market.

X A Market Participant wishes to sell a large amount of USD/MXN. Repeatedly, it shows small sell quotes on a widely consulted Electronic Trading Platform.

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consulted. The Market Participant chooses to use another dealing code from the same institution on the same Electronic Trading Platform in order to lift these successive larger orders with the intention of deceiving the market.

This is an extension of the previous example. The conduct gives the false impression that multiple counterparties are participating in a rally when in reality they come from the same institution. The use of these strategies must be avoided.

X A Client can obtain a gain by raising the 4 p.m. reference exchange rate (fix) in relation to a particular currency pair. It calls a bank at 3:45 p.m. and places a Fixing Order and then instructs the bank to "buy the amount as soon as possible in the first minute of the reference exchange rate calculation time window."

Market Participants must not require transactions or create orders with the intention of creating a disruption in the functioning of the market or impeding the price discovery process, including the adoption of strategies aimed at creating a false impression of the market price, depth, or liquidity. The Client's request in this example is with the intention of creating a false impression of the market price and its depth.

X A hedge fund has a long position on an exotic Put option in euros. The currency has been weakening during the New York session towards the knock-in level. Knowing that liquidity will continue to decrease during the Asian session, due to a holiday, and in order to reach the knock-in level of the option, the hedge fund leaves open a large Stop Loss Sell Order for the Asian open with Bank A at a fair price just above the knock-in level. At the same time, the hedge fund leaves a limit buy order with Bank B for the same amount in euros but at a level just below the knock-in level. Neither Bank A nor Bank B knows that the hedge fund has a long position on an exotic Put option in euros.

Market Participants must not solicit transactions or create orders with the intention of creating artificial price movements. In this example, the hedge fund has sought to benefit (by achieving the option's knock-in level) by leaving orders designed to cause artificial price movements inconsistent with the prevailing market conditions.

X An Interdealer Brokerage Service (IDB) announces a price without having received instruction from a brokerage house, a dealer bank, or another financial institution. When a dealer attempts to hit or lift the price, the Interdealer Brokerage Service (IDB) informs the dealer that the quote has already been traded by another participant or has been withdrawn.

Market Participants must not provide prices with the intention of impeding the price discovery process, including strategies designed to create a false impression of the market price, depth, or liquidity. The practice illustrated in this example, sometimes known as "flying a price," is a pricing strategy that intentionally gives a false impression that there is greater liquidity than is actually available. It can occur in an Interdealer Brokerage Service (IDB) that operates by voice or electronically, or through an Electronic Trading Platform that falsely attributes its prices to another participant. This conduct is also inappropriate for other types of Market Participants.

Market Participants must understand the way in which reference prices, including maximums and minimums, are established in relation to their operations and/or orders. (PRINCIPLE 13)

✓ A market maker reveals to a Client the way in which reference prices will be established. After a steep drop in USD/JPY, the market maker executes the Client's Stop Loss Order using a reference rate in accordance with its own policy and its prior disclosure.

Market Participants must understand the way in which reference prices are established in relation to their operations and orders. In this example, the market maker reveals to the Client the way in which reference prices will be established.

Margins must be fair and reasonable. (PRINCIPLE 14)

X A bank receives from a Client a Stop Loss Order to sell GBP/USD at a certain level.

When said level is being traded in the market, the bank executes the Stop Loss Order with slight slippage. Notwithstanding the above, the bank fills the Client's order at a slightly lower exchange rate after charging the Margin and without having previously informed the Client that the total execution price of a Stop Loss Order was subject to a Margin.

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The Margin must be fair and reasonable, and Market Participants must promote transparency by informing their Clients that their final transaction price may include a Margin and that it may impact the price and execution of orders triggered at a specific level. In this example, the bank has not revealed to the Client the way in which the Margin will affect the total price of the order.

X A bank charges a higher margin to a company than the margin it charges to other companies of the same size, credit risk, and business relationship, taking advantage of the company's lack of sophistication to understand and question the price granted by the bank.

The Margin must be fair and reasonable and may reflect various considerations, such as risks assumed, costs incurred, and services provided to a particular Client, factors related to a specific transaction and the general relationship with the Client. The application of the Margin in this example is neither fair nor reasonable, as it discriminates between Clients based on their level of sophistication. In the following example, the difference in the Margin charged to each of the Clients is motivated by differences in the general relationship with the Client, in this case, by the volume of business.

✓ A bank charges companies of similar size and credit level different Margins due to differences in the dimension of their relationship with Clients. For example, the volume of business these Clients operate with the bank is of very different magnitudes.

Market Participants must identify and resolve their operational discrepancies as soon as possible in order to contribute to the good functioning of the Foreign Exchange Market. (PRINCIPLE 15)

X A hedge fund executes a transaction through a Dealer to perform a Give Up of a brokerage house to its Prime Broker. The terms of the transaction provided by the hedge fund to its Prime Broker cannot be reconciled with those provided by the Dealer. When notified by the Prime Broker that there is a discrepancy in the transaction details, the hedge fund responds that the Dealer has made a mistake and that the Prime Broker must resolve the operational discrepancy with the Dealer.

Market Participants must resolve discrepancies as soon as possible. In particular, Clients of Prime Brokers and dealers are responsible for resolving operational discrepancies to make timely modifications and reconcile transaction terms through the Prime Broker. In this example, the hedge fund assigns the responsibility for resolving the discrepancy to the Prime Broker. Notwithstanding the above, the hedge fund should have contacted the Dealer directly to resolve this discrepancy, since the identity of the counterparties is known by the hedge fund and the dealer.

✓ A Client uses an Electronic Trading Platform to execute foreign exchange transactions on behalf of its Prime Broker. The rules of the Electronic Trading Platform do not allow revealing to the Client the name of the Dealer whose orders correlate with those of the Client itself. The Electronic Trading Platform confirms a transaction at a price that differs from the Client's records. The Electronic Trading Platform and the Prime Broker work together with the Client to provide a prompt solution to the operational discrepancy. Specifically, the Electronic Trading Platform contacts the dealer while maintaining the Client's confidentiality.

Market Participants must resolve operational discrepancies as soon as possible and protect Confidential Information, as established in Principle 20. When access to the market can be obtained anonymously, the grantor of access must help resolve operational discrepancies. In this example, although the Client and the dealer are responsible for resolving the transaction discrepancy, they require help from the Prime Broker and the Electronic Trading Platform since the Client and the Dealer do not know, and should not know, the name of the other.

Market Participants that employ the last look practice must be transparent in its use and provide relevant information to their Clients. (PRINCIPLE 17)

X A Market Participant sends a transaction request to an anonymous liquidity provider to buy 1 million EUR/USD at a price of 13 through an Electronic Trading Platform while the displayed price is 12/13. It is understood that this transaction request is subject to a last look window before being accepted and confirmed by the anonymous liquidity provider. During said window, the liquidity provider places buy orders at levels lower than the price of 13. In case these orders are filled,

Wednesday, August 24, 2022 OFFICIAL GAZETTE 279

the liquidity provider confirms and fills the Market Participant's operation request, but if the buy orders are not filled, it does not attend to the operation request of the Market Participant.
Market Participants must only use the last look practice as a risk control mechanism to verify factors such as validity and price. In this example, the liquidity provider improperly uses the information contained in the Client's operation request to determine if it can obtain a profit and has no intention of filling the order unless it can obtain a profit. ✓ A Client sends various operation requests subject to a last look window and its liquidity provider has made known the purposes for which the last look practice may be used. The Client reviews information related to the average on how its orders are filled (average fill ratios) in such operations. The information suggests that the average is lower than expected and the Client goes to its liquidity provider to discuss the reasons for this. Market Participants that employ the last look practice must be transparent regarding its use and provide appropriate information to their Clients. It is also good practice to be able to engage in conversations with Clients about how their orders have been handled. In this example, the transparency of the Market Participant has allowed the Client to make an informed decision about how orders are handled and promotes dialogue between the two parties. X A Client requests to buy 25 million EUR/USD on an Electronic Trading Platform. During the last look window, the Market Participant, taking into consideration the Client's operation request, modifies its prices upwards on the Electronic Trading Platforms. Market Participants must not use the information contained in a Client's operation request during the last look window. In this example, the Market Participant uses the information contained in the Client's operation request to change its prices on the Electronic Trading Platforms during the last look window. By doing this, the Market Participant could potentially signal to the market the Client's interests, who could be at a disadvantage if the Market Participant subsequently rejects the operation. ✓ A Client requests to buy 20 million USD/MXN from a Market Participant through an Electronic Trading Platform. During the last look window associated with that operation request, the Market Participant continues updating its prices on USD/MXN and other pairs on a number of platforms. The prices that the Market Participant shows on these platforms reflect normal sources of the Market Participant's pricing algorithms, including movements in market prices and other operations completed by the Market Participant, notwithstanding the foregoing, it does not use the information from the Client's operation request as a source of such price changes during the last look window. Market Participants may update their prices while a last look window remains open if the update is completely independent of the relevant operation request, as doing so allows Market Participants to facilitate continuous price formation. Given the speed of electronic negotiations, Market Participants
will need to make periodic updates to their prices while one or more last look windows remain open. In this example, the Market Participant does not take into account the operation request when updating prices during the last look window. X A Client requests to sell 50 million EUR/USD to a Market Participant (Bank A), at the price quoted to it by Bank A itself. The Client makes an operation request under the understanding that Bank A will not assume any market risk related to the operation request and that it will only complete the request subsequently after conducting offsetting operations or that offsetting transactions in the market (offsetting transactions). During the last look window, Bank A sends an operation request to another Market Participant (its liquidity provider), to sell 50 million EUR/USD. This operation request is accepted by the liquidity provider. During the last look window, the market moves downwards. Bank A executes the Client's order for 45 million EUR/USD, rather than doing so for the total amount of 50 million that it originally operated, rejecting the last

280 OFFICIAL GAZETTE Wednesday, August 24, 2022 5 million EUR/USD remaining. Bank A covers its remaining short position of 5 million EUR/USD in the market at a lower price.
Market Participants that use operation request information to conduct operational activity during the last look window must always transmit to their Client all the volume that was operated during that period. In this example, the bank did not transfer to its Client the total volume operated in the last look window, but rather sought to gain an advantage over price movements to close its position with a greater profit in the market. Market Participants that provide algorithm-based operations or aggregation services to their Clients must provide them with adequate information on how they operate. (PRINCIPLE 18) X An aggregator channels an order preferentially through an Electronic Trading Platform that offers brokerage rebates. The aggregator's provider does not inform Clients that brokerage rebates affect preferences in the choice of the medium through which they are channeled. Market Participants that provide aggregation services to Clients must inform them adequately about how they operate, in particular, they must inform them generally about how the preference order for channeling services is determined. In this example, the service provider has not informed a determining factor in the preference order for channeling services. ✓ A Client selects a bank's execution algorithm to buy 100 million GBP/USD. The bank advertises this particular product as an algorithm that executes on a 'Direct Market Access' ('Direct Market Access', DMA, in English) basis. The Client understands that this means that the bank's algorithm desk will select the corresponding liquidity subsequently after comparing multiple sources, with the intention of offering the Client the highest quality of execution during that period. The bank has also indicated that the algorithm in question may use internal liquidity. Likewise, the bank has also revealed how the algorithm handles potential conflicts of interest arising from this dual role. After the order has been executed, the bank provides post-trade data transparently, demonstrating the origin and price of each operation executed to complete the order placed by the algorithm. Upon reviewing the post-trade data, the Client feels confident that the algorithm selected the best available liquidity at the time of execution. Market Participants must be clear about the roles under which they act. Market Participants must handle orders fairly and transparently in line with the roles under which they act (Principle 9). Market Participants that provide algorithm-based operations or aggregation services to Clients must adequately disclose information related to how they operate. Banks that wish to offer their own liquidity while also operating DMA Algo algorithms must provide clarity and transparency regarding this practice through information disclosure and handle any conflict of interest that may impact the handling of the Client's order. Likewise, they must make available to the Client sufficient post-trade information, so that the
Client can verify that the algorithm always selected the best available prices in the market, or with respect to the bank's internal liquidity. X A Client selects a bank's execution algorithm to buy 100 million GBP/USD. The bank advertises this particular product as an algorithm that executes on a 'Direct Market Access' ('Direct Market Access', DMA, in English) basis. The Client understands that this means that the bank's algorithm desk will select liquidity subsequently after comparing multiple sources, with the intention of offering the Client the highest quality of execution during that period. The bank has also indicated that the algorithm may use internal liquidity. However, the bank is not correctly managing the conflicts of interest arising from this dual role: the market-making desk has access to the content of the primary order (parent order), and the execution algorithm logic is predetermined to direct the last 20 million GBP/USD to the market-making desk with the objective of maximizing performance (of the bank). Market Participants must handle orders fairly and transparently, in line with the roles under which they act (Principle 9), likewise, Market Participants that provide algorithm-based operations or aggregation services to Clients must adequately disclose information related to how they operate. In this example, the bank has not fully revealed how the DMA Algo algorithm works or manages conflicts of interest in this dual role. The bank in question is using Confidential Information and prioritizing its own pricing determination over that determined by the market.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 281 INFORMATION EXCHANGE Market Participants must identify and protect Confidential Information (PRINCIPLES 19 and 20) X Asset Manager to a market-making bank: Bank ABC just called me to tell me that it has Interest (Axe) in buying EUR/SEK. Are you seeing buys too?
Market Participants must not reveal or request Confidential Information, including information on the Interests (Axes) of their Clients or on operational activity. In the previous example, the asset manager reveals and requests Confidential Information, in this case, the Interest (Axe) of another bank. In the following example, the asset manager refrains from requesting Confidential Information. ✓ Bank ABC to an asset manager: We have an Interest (Axe) in executing a spot operation of EUR/SEK. Do you have any interest? Asset manager to market-making bank: Thank you for calling but we have no interest today in EUR/SEK X Hedge Fund to market-making bank: Are you long in Pounds Sterling? Market Participants must not request Confidential Information, including information on current positioning or operational activity without having a valid reason to do so. In the following example, the hedge fund asks for a market perspective and not for specific positionings. ✓ Hedge Fund to market-making bank: What do you think about the pound sterling at these levels? X A Client requests a bank to provide a quote for 150 million USD/MXN. The bank is not an active market maker in this currency cross. The market-making bank calls another market-making bank: I am being asked for a quote on both sides (bid and ask prices) for 150 million USD/MXN. Could you show me your USD/MXN pricing matrix so that I can have an idea of what spread to quote? Market Participants must not reveal or request Confidential Information, including information on the operational activity of their Clients. In the previous example, the market-making bank reveals and requests Confidential Information – in this case, the Client's interest and proprietary information about a pricing matrix, respectively –. In the following example, the bank only requests the information it requires according to its needs. ✓ A Client requests a bank to provide a quote of 150 million USD/MXN. The bank does not have a franchise for this currency pair, so this market maker calls another market-making bank: Can you give me the bid and ask quote for 150 million USD/MXN? X A bank has implemented an institutional policy designating operational recommendations produced by its Foreign Exchange Market Research Department, which are confidential until they are released to all its Clients simultaneously. Bank's Foreign Exchange Market Analyst to a hedge fund: Our view on USD/JPY has changed in accordance with new forecasts regarding central bank reference rates and later today I will publish a new positive (bullish) operational recommendation. Market Participants must not reveal Confidential Information. In this example, the analyst has revealed certain Confidential Information – its operational recommendation – to an external party before its publication. In the following example, the Foreign Exchange Market Analyst reveals research work after it has been published. ✓ Bank's Foreign Exchange Market Analyst to hedge fund: I
am calling to verify if you received our positive (bullish) recommendation on USD/JPY published an hour ago in accordance with new forecasts of central bank reference rates. X A hedge fund manager goes to a portfolio review with a large Client. In the review, the manager learns that the Client will soon change part of its positioning in a currency cross to another pair. Advice is requested from said manager, but the allocation mandate is not granted. Upon leaving the meeting, the manager calls his trading desk to inform him of this imminent operation. Market Participants must not reveal Confidential Information except to those persons who have a valid reason to receive it. In particular, information obtained from a Client can only be used for the specific purpose for which it was provided. In this example, the change in currency positioning is Confidential Information and has been revealed to the hedge fund manager for advisory purposes only. This information must not be revealed to the trading desk.

282 OFFICIAL GAZETTE Wednesday, August 24, 2022 X A fund asks a bank to work a buy order for a large amount of EUR/PLN at a reference rate (fixing). Immediately after the call, the bank contacts another hedge fund that is its Client and says, “I have a buy order for a large amount of EUR/PLN to work before the fixing determination for a Client. I think this may move the market upwards in the next 20 minutes, so I can work a flow for you too.” Past, present, and future operational activity of a Client is Confidential Information that cannot be revealed to other Market Participants. Market Participants must communicate clearly, precisely, professionally and without being misleading. (PRINCIPLE 21) X An asset manager calls three banks and says, “Could you give me a price for 50 million GBP/USD, please? This is my total amount.” The asset manager buys 50 million GBP from each of the three banks for a total of 150 million GBP. Market Participants must communicate clearly, precisely, professionally and without being misleading. In this example, the asset manager deliberately misleads the banks to secure a better price. If asked, the asset manager could refuse to reveal if its request is for the total amount. X A sell-side institution has a large amount of an illiquid currency to sell. A trader at the institution contacts several Market Participants, telling them that he is hearing that a large buy of this currency will take place, when in fact, it is not the case. Market Participants must communicate in a manner that is not misleading. In this example, the trader communicates false information with the intention of moving the market to his own interest. Market Participants must communicate Market Color appropriately. (PRINCIPLE 22) ✓ A corporate Client has left a 24-hour buy level for the yen with a counterparty and the buy level has just broken. Bank sales staff to corporate Client: The market has fallen 200 ticks in the last 15 minutes, there have been significant sales across various names and prices have been showing abrupt jumps (gapping). The market continues to be offered, but the movement seems to be limited only to the yen. We do not know what the trigger is but there have been rumors on the internet about an earthquake, although it has not been confirmed through any of the main news channels. Market Participants must communicate Market Color adequately and without compromising Confidential Information. In this example, the sales person shares information about recent market events, with the flow sufficiently aggregated and third-party information attributed to them clearly. (Principle 21) ✓ A firm operating an anonymous multi-dealer Electronic Trading Platform asks its users (as part of its standard information collection or onboarding processes known as “Know Your Client”), if they have adhered to the latest version of the Declaration of Commitment to the Global Code of Conduct. This information is loaded into a database in the same way that
other user information is stored. Additionally, the aforementioned information could be included along with other tag information that the platform provides, if applicable, or could be added to the standard reports generated post-trade. Anonymous trading platforms must make an effort to make available to users information regarding whether a counterparty, current or potential, of a particular operation has manifested that it has adhered to the Declaration of Commitment to the current version of the Global Code of Conduct. In this example, the firm uses its onboarding process to record the status of its users in relation to the Code. X Bank sales person to a hedge fund: We have seen considerable demand for NZD/USD from XYZ (where “XYZ” is the code for a specific Client) this morning. Market Participants must communicate Market Color adequately, sharing the flow of information anonymously and in an aggregated manner. In the previous example, the information reveals the identity of a specific Client. In the following example, the communication is aggregated in terms of the Client category, so that it cannot be identified.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 283

✓ Salesperson at a bank to a hedge fund: We have seen considerable demand for NZD/USD from institutional investors this morning.
X Asset manager to a market-making bank: I heard you have been a significant buyer of GBP/USD. Is it the same British firm again?

Market Participants must not request Confidential Information, including information regarding the operational activity of a specific Client. Market Color must be anonymous and aggregated to avoid revealing flows related to a specific Client. In the previous example, the asset manager requested Confidential Information. In the following example, the manager requested Market Color in a general manner.

✓ Asset manager to a market-making bank: Could you give me some color on the 100-point increase in GBP/USD during the last hour?
X Market-maker to hedge fund: Yen liquidity has deteriorated. Right now, it took me 15 ticks to cover my sale of 100 million USD/JPY to a Japanese automobile manufacturer.

Market Participants must report Market Color appropriately, sharing information flow only in an anonymous and aggregated manner. In the previous example, the communication refers to a specific recent transaction and may reveal the identity of a specific Client.
In the acceptable example below, the reference to execution time is broad and the Client type is generalized.

✓ Market-maker to hedge fund: Yen liquidity has deteriorated. Last week I was able to trade 100 million USD/JPY for only 3 ticks, but today it took me 15 ticks and twice the time.

Market Participants must have clear guidelines on the approved methods and channels of communication. (PRINCIPLE 23)

X A salesperson has several filled orders to confirm with a client but has left the office early. As they do not have access to a phone that records conversations, they save the texts of the confirmations made with their Client via their personal cell phone, which does not have call recording functionality.

It is recommended that communication channels be recorded, particularly if used to conduct transactions. In the previous example, the salesperson confirms transactions on an unrecorded line. In the following example, the salesperson strives to find a way for transactions to be confirmed through recorded means.

✓ A salesperson has several filled orders to confirm with the client but has left the office early. As they do not have access to a phone that records conversations, they contact their coworkers to have them contact the Client to confirm the transactions using recorded means.

Risk Management and Compliance

Market Participants must have practices to limit, monitor, and control risks associated with their operational activity in the Foreign Exchange Market. (PRINCIPLE 27)

X A bank's Client has access to liquidity in the Foreign Exchange Market only through an Electronic Trading Platform offered by the bank's sales and operations area and has no other source of liquidity. The Client has not evaluated the risks of relying on a single source of liquidity. As a response to an unexpected market event, the bank adjusts the liquidity it provides through its Electronic Trading Platform, which severely impacts the Client's ability to manage their foreign exchange positions. As the Client has no contingency plan to access the market (including relationships with the bank's voice sales and operations area), the Client's ability to operate is limited.

Market Participants must have practices to limit, monitor, and control risks related to their operational activity in the Foreign Exchange Market. In particular, Market Participants must be aware of the risks associated with relying on a single source of liquidity and must adopt contingency plans when appropriate. In this example, the Client is unaware that their dependence on a single source of liquidity presents a risk to their business and has no contingency plans established, which seriously limits their ability to manage their foreign exchange positions.

✓ A Market Participant has a significant Client franchise and maintains diverse channels to access liquidity, including two Prime Brokerage services in foreign exchange and some bilateral contracts. For operational efficiency, the Market Participant channels the majority, but not all, of its flows through one of its Prime Broker services but regularly channels a smaller, but representative, portion of its portfolio to the other Prime Broker service and its bilateral relationships.

284 OFFICIAL GAZETTE Wednesday, August 24, 2022

Market Participants must be aware of the risks associated with relying on a single source of liquidity and incorporate contingency plans when appropriate. In this example, the Market Participant has chosen to maintain and use as many sources of liquidity as necessary according to the nature of its business.

X A small private investment fund copies the risk checks specified by its Prime Broker to remain within prudent limits, including its Net Open Position (NOP) and Daily Settlement Limits (DSL). The fund's algorithm has a programming virus that causes an out-of-control algorithm that systematically loses money. The fund discovers that despite having verified its limits, the fund incurs losses that threaten its survival.

Market Participants must have practices to limit, monitor, and control risks related to their foreign exchange operations. In this example, the investment fund has inadequate processes to identify and handle specific operational risks of its business. The limit verification mechanism failed to alert the fund to a drop in the value of its position. At the extreme, an algorithm that systematically loses, rather than makes money, may be entirely within its NOP and DSL limits because its position will decrease in value.

Market Participants must have Operational Continuity Plans. (PRINCIPLE 33)

X A Market Participant uses an alternate operations site in the same region and relies on personnel from the same area as its primary site. The Market Participant has not developed an appropriate Operational Continuity Plan for the nature, size, and complexity of its business. During a civil emergency, the Market Participant discovers that it cannot access its primary site nor its alternate operations site because both share the same telecommunications route. It also realizes that it cannot contact essential personnel for its operations.

Market Participants must have operational continuity plans appropriate to the nature, size, and complexity of their business and that can be implemented quickly and effectively. In this example, despite having a primary site and an alternate operations site, the Market Participant does not have a robust operational continuity plan to handle the disruption. In the following two examples, the Market Participant has prepared an operational continuity plan that is, in each case, appropriate given the nature, size, and complexity of its operations.

✓ A Market Participant chooses a geographically distant alternate operations site whose infrastructure can be controlled by personnel in a remote location.

✓ A Market Participant decides that it will not maintain an information backup center and, in the event that its information center is unavailable, it will reduce or eliminate its positions by calling one of the market-makers with whom it has a relationship and will operate by voice until its information center is available again.

Prime Brokerage Participants must strive to monitor and control trading permissions and credit provisions in Real Time at all stages of trade execution, consistent with their market activity profile, in order to reduce the risk for all parties involved. (PRINCIPLE 41)

X A Client of a Prime Broker is provided with exposure limits for each of its operators in terms of its Prime Brokerage contract. The Client assumes that the operators are monitoring these limits and does not incorporate pre-trade verification procedures within its internal processes. The Prime Brokerage Client negotiates block trades from a number of underlying accounts in a single ticket, providing the operator with the portion of the Prime Brokerage account after executing the trade. The Client exceeds its exposure limits with the operators and only becomes aware of this fact through the operator when providing the breakdown of its trade.

Prime Brokerage Clients must strive to monitor their applicable limits as specified in their Prime Brokerage contract. This is especially important when an Operator is unaware of the precise breakdown of accounts in a block trade. Clients must have pre-trade compliance-monitoring procedures so that only trades that fall within the established limits are requested from the operators.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 285

(pre-trade compliance-monitoring procedures) in order that only trades that fall within the established limits are requested from the operators.

✓ An operator realizes that a Client repeatedly exceeds their authorized limits due to routine controls and informs the Client of this situation, with a warning.

Prime Brokerage Participants must strive to monitor and control the provision of credit in Real Time. While this example denotes a negative scenario (exceeding authorized limits), it is a positive example because the operator presents appropriate monitoring of its risk controls to detect the continuous violation of established limits and the adequate exchange of information between the affected parties.

CONFIRMATION AND SETTLEMENT

Market Participants must confirm foreign exchange transactions as soon as possible and in a secure and efficient manner. (PRINCIPLE 46)

✓ A Client executes a spot USD/JPY trade on a bank's platform and is immediately provided with the trade confirmation through said platform. After reviewing the details of the trade received from the bank, the Client can immediately send a confirmation message for the trade.

Market Participants must confirm their foreign exchange transactions as soon as possible and in a secure and efficient manner. In this example, the bank's automatic transmission and the initiation of the confirmation process allow the Client to send the corresponding confirmation message within a short period of time.

✓ A local Market Participant executes a foreign exchange transaction with its parent company via telephone. Both the local entity and its parent company confirm the transaction directly through a common, automated, secure electronic platform.

Market Participants must confirm their transactions as soon as possible and in a secure and efficient manner. In this example, both entities use a common, automated, and secure electronic platform to confirm their transaction – an alternative to the automated confirmation systems used throughout the market.

Market Participants must review, confirm, and allocate block trades as soon as possible. (PRINCIPLE 47)

X A corporate treasurer has had a busy morning due to a large number of meetings. There are ten trades to be made, including some block trades with sub-allocations for the pension fund. The treasurer calls a counterparty by phone, completes the total of the ten trades with only the sufficient credit and waits to enter all trades into the system until after lunch.

The details of block trades must be reviewed and confirmed as soon as possible after their execution. In this example, the time lapse between execution and entry into the system does not comply with this principle and may cause a delay in confirmations.

“Annex 2
Glossary of Terms

Agent: Market Participant that executes orders on behalf of its Clients, in accordance with the mandate granted by the Client, and without assuming any market risk related to said orders.

Execution Algorithm: Execution of an order through computer programs that use algorithms. For example, at the most basic level, a computer program automates the process of dividing a larger order known as a ‘parent order’ into multiple smaller orders called ‘child orders’, and executes them over a period of time.

Applicable Legislation: Laws, regulations, and other general provisions applicable to Market Participants and the Foreign Exchange Market in each jurisdiction where Market Participants conduct business.

Interest (Axe): The interest that a Market Participant may have in executing a transaction in a specific product or currency pair at a price that could be better than the prevailing market rate.

286 OFFICIAL GAZETTE Wednesday, August 24, 2022

Client: Market Participant that requests transactions and activities through or from other Market Participants that provide market-making services or other trade execution services in the Foreign Exchange Market. A Market Participant may act as a Client in some circumstances or as a market-maker in others.

Compliance Risk: Risk of incurring legal or regulatory sanctions, material financial losses, or reputational damage as a result of a Market Participant failing to comply with laws, regulations, rules, industry standards, and codes of conduct applicable to their foreign exchange activities. Compliance includes observing appropriate standards of market conduct, managing conflicts of interest, fair treatment of clients, and adopting measures to prevent money laundering and terrorist financing.

Confidential Information: Information that must be treated as reserved, including that related to Foreign Exchange Market Transaction Information and Information Designated as Confidential.

Corporate Treasury Center: Market Participant within a group or consortium formed primarily by non-financial companies, that conducts external transactions (outside the group) as a Client (unless expressly stated that it acts in another capacity), both on its own behalf and on behalf of its parent companies, subsidiaries, branches, affiliates, or companies that make up the business group it represents.

Information Designated as Confidential: Reserved, confidential, exclusive-use, proprietary information, and any other information that Market Participants agree to designate with a higher level of reserve, which at their discretion, may be formalized through the signing of written confidentiality agreements or any similar agreement.

Direct Market Access Algorithm (DMA Algo): A particular execution algorithm. In order to complete the instructions of a Client presented through a DMA Algo, a Market Participant will select liquidity through multiple sources, with the intention of offering the highest quality of execution available during that period to the Client. All liquidity obtained to complete the order is transferred directly to the Client through transactions between the Market Participant and the Client. In those cases where the Market Participant provides its internal liquidity to the algorithm, said participant must compete on an equivalent and fair basis with other external sources of liquidity and must be transparent about its dual role as algorithm provider and liquidity provider.

Direct Payment: Transfer of funds to the account of the counterparty involved in the transaction to settle a foreign exchange transaction.

Electronic Trading Platform: Any system that allows Market Participants to execute transactions electronically in the Foreign Exchange Market.

Electronic Trading Activities: These activities may include trading, taking, or determining prices and providing and/or using trading algorithms, through an Electronic Trading Platform.

FX: Foreign Exchange Rate.

Foreign Exchange Market: Wholesale foreign exchange transaction market.

Foreign Exchange Market Transaction Information: May take various forms, including information related to past, present, or future transactions or to the Market Participant's or its Clients' own positions, as well as related information that is sensitive and received as part of its foreign exchange activities.

CMC (FXC): Foreign Exchange Market Committee.

Fixing Order: Order to trade at a specific reference foreign exchange rate.

Give Up: Process by which transactions are transferred to a Prime Broker by a counterparty designated by the Prime Broker to execute transactions with a Prime Broker Client.

Wednesday, August 24, 2022 OFFICIAL GAZETTE 287 Global Code of Conduct: Set of global principles of good practices in the Foreign Exchange Market.
Interdealer Broker (IDB): Financial intermediary that facilitates transactions between broker-dealers, dealer banks, and other financial entities, rather than private individuals. This includes brokerages (brokers) that execute orders via voice, electronic means, and hybrid systems. Brokerages (brokers) with any degree of electronic execution are also considered a subcategory of Electronic Trading Platforms. Mark Up: Differential in favor or charge that may be included in the final price of a transaction as consideration to the Market Participant for various considerations, which may include assumed risks, incurred costs, and services provided to a particular Client. Market Color: Shared viewpoint among Market Participants regarding the general state of the market and its trends. Market Order: Request or communication from a counterparty to enter into a foreign exchange transaction with a Market Participant to buy or sell a foreign exchange instrument at the level available in the market at that time. Market Participant: See the definition contained in the preamble. Principal Transactions: Operation by personnel for their own benefit or for their indirect benefit (for example, for the benefit of family members and close persons). Pre-Hedging: Risk management associated with one or more Customer orders in advance, designed to benefit them in relation to said orders and any other transaction resulting from them. Prime Broker: Entity that grants credit intermediation to one or more parties in a transaction, in accordance with the previously agreed terms and conditions that govern the provision of said credit. This entity may also offer complementary or related services including operational and technological services. Prime Brokerage Participant: Market Participant that acts as (i) Prime Broker, (ii) Client using the services of the Prime Broker (Prime Broker Client), or (iii) Market Participant acting as a price maker or execution intermediary (such as an Agent or platform) between the Prime Broker Client and the Prime Broker. Principal: Market Participant acting on its own account. Real Time: Time closest to when a process or event actually takes place. Settlement Risk: Risk of loss of the total amount of the transaction due to the counterparty's failure to settle. This can arise from paying the currency being sold, but having a failure to receive payment for the currency being purchased (This Settlement Risk is also known as “Herstatt Risk”.) SSI (Standing Settlement Instruction): Permanent settlement instruction. Standards: Internal policies of a Market Participant, external codes (the Global Code of Conduct and any of its annexes published by regional Currency Committees or in the jurisdictions where the Market Participant is constituted or operates) and other relevant guidelines (such as those established by international public sector organizations like the Bank for International Settlements and the Basel Committee on Banking Supervision).
Stop Loss Type Order: Contingent order that activates a buy or sell order for a specific notional amount when a reference price reaches or exceeds a predetermined activation level. There are different variants of Stop Loss Type Orders, depending on the execution relationship between counterparties, the type of reference exchange rate, the trigger, and the nature of the activated order. A series of parameters are required to fully define a Stop Loss Type Order, such as the reference exchange rate, the order amount, the validity period, and the trigger. Payment to Third Parties: Transfer of funds to the account of an entity distinct from the counterparty involved in the transaction to settle a foreign exchange operation.

288 OFFICIAL GAZETTE Wednesday, August 24, 2022 Transaction Cost Analysis (TCA): Analysis to evaluate the quality of execution of a transaction – for example, by comparing the resulting price in the execution of a transaction against a given reference.
Voice Brokerage Service: An Interdealer Broker with responsibility for both counterparties, that negotiates foreign exchange transactions via telephone, conversational systems, and/or hybrid systems.”
TRANSITORY PROVISIONS
FIRST.- This Circular shall enter into force the day following its publication in the Official Gazette of the Federation.
SECOND.- Entities that, as of the date of publication of this Circular, have communicated to the Bank of Mexico their determination to adhere to the Global Code of Conduct in accordance with letter A of Rule 3a., must send a new communication in terms of the second paragraph of said Rule 3a., no later than December 31, 2022.
THIRD.- Entities that, as of the date mentioned in the preceding TRANSITORY SECOND, have not presented the communication indicated in the cited TRANSITORY SECOND, will be identified in the publication referred to in Rule 6a. as if their determination was not to adhere to the Global Code of Conduct. The foregoing, without prejudice to the sanctions applicable under the relevant provisions. Mexico City, August 16, 2022.- BANK OF MEXICO: Director General of Central Banking Operations, Gerardo Israel García López.- Initials.- General Legal Director, Luis Urrutia Corral.- Initials. For any inquiries regarding the content of this Circular, please contact the Central Banking Authorizations and Inquiries Department, at phones (55) 5237-2308, (55) 5237-2317 or (55) 5237-2000 Ext. 3200.

Circular 10/2022 — Modifies Circular 22/2017

Lineage: In force

Timeline

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