One by one, dealers embrace standardised FX reject codes

Dealers are slowly adopting standard practices around codes that inform foreign exchange counterparties of the reasoning behind trade request rejections – so-called reject codes – which help them understand why a trade request has been unsuccessful.

A number of liquidity providers (LPs) – including JP Morgan, State Street and UBS – are starting to use a set of these reject codes proposed by the Investment Association to better inform counterparties about the reasons behind unsuccessful trading attempts.

“We’ve seen real progress being made within the last few months,” says Hugo Gordon, senior policy adviser for the investment and capital markets team at the Investment Association – a buy-side trading body with 250 members across the globe and £8.5 trillion ($10.5 trillion) in managed assets. “That’s been driven not just by the IA’s own work but also by the wider discussion around reject codes within the market.”

FX dealers have previously faced criticism from the Bank of England for not properly explaining themselves when declining to accept client orders. The most recent version of the FX Global Code now contains more specific language around providing reject codes.

“It should now be easier to assess why trades have gone wrong – making it easier to produce better outcomes for clients,” says Gordon. “By the end of the year, we hope we’re in a position where a good number of LPs are providing these updated codes to clients.”

A reject code is typically a numerical code or abbreviation that ­a liquidity provider sends to a counterparty making an unsuccessful trade request. If a counterparty’s trade is rejected due to a lack of credit, for example, the LP might send a reject code along the lines of ‘CR’.

One issue that has made it difficult for counterparties to understand what aspect of their trade might have caused rejection is the lack of standardisation used by different LPs in the FX market. Without a proper understanding of why trades have been rejected, counterparties can’t meaningfully change their trading behaviour to ensure a higher ratio of trade requests are accepted.

To help simplify this process, the IA published a February 2020 paper, in which it proposed 13 new standardised reject code categories.

Under these proposals, FX brokers, dealers and platforms are advised to use the 13 high-level categories to feed back to their counterparties when they reject a trade request. As well as helping to identify and remedy the cause of rejection more quickly, this will allow counterparties to better compare the behaviour of dealers during their last look windows.

The IA gave LPs an initial deadline of the first quarter of 2020 to map their reject codes to its proposed categories and asked for feedback on their progress by the second quarter of that year. But the Covid-19 pandemic quashed the paper’s early momentum – and with it any progress toward standardisation.

“It’s fair to say that progress was relatively slow when we first published this paper back in February 2020,” says Gordon. “A lot of projects didn’t get the full attention that they might have previously received.”

So, in 2021, the group published a second paper, in which it restated its focus on the project and this time called on LPs to map their codes to its categories by the end of Q3 2021 – with full implementation to follow by the end of the first half of 2022.

Now, in addition to the aforementioned trio of dealers, a number of LPs are in the process of updating their reject code systems, notes Gordon, and are expected to have fully implemented the new codes within the coming months.

“We’re also aware of some other LPs that haven’t taken this work up as much as others and so we’re continuing to speak to them and are encouraging them to progress in this work as well – with our individual members continually engaging with these LPs on the issue too,” he adds.

Work in progress

For LPs that have yet to engage in standardisation work, technology constraints could well be playing a role in the delay, believes Stephane Malrait, global head of market structure and innovation for financial markets at ING. But he says these are not impossible to overcome.

“Some organisations rely heavily on external software vendors to upgrade their systems, and in that situation such upgrades can take some time. There’s a lot of testing that needs to be approved and conducted,” says Malrait. “But overall, updating your reject codes shouldn’t involve too much work. When an LP rejects a trade today there’s already a reject code being generated to clients – you just have to tailor the logic that is being applied to that coding system.”

One LP that has already standardised its reject codes is Credit Suisse. While not utilising the same reject code categories proposed by the IA – which are designed to act as guidance rather than prescriptive codes – the Swiss bank has already completed work to upgrade and streamline the reject codes they provide to counterparties after an unsuccessful trade attempt.

“We standardised our FX spot reject codes a few months ago to six or seven codes that can quite easily be deciphered and understood,” says John Estrada, global head of e-macro at Credit Suisse. “For example, our credit reject code is ‘Lack of Credit’, which is fairly self-explanatory to counterparties. We’ve tried to make our codes as easy to follow as possible as we’re very supportive of reject code standardisation – as are a lot of our counterparts in the market.”

JP Morgan, State Street and UBS declined to comment on their progress in this respect.

Besides the more specific language of the FX Global Code, Malrait believes another reason for the current progress on standardisation is that additional hold times during last look are no longer considered a valid reason for LPs to reject a counterparty’s trade request.

One of the main reasons people wanted more clarity around reject codes was because they felt LPs were “hiding things” in their last look practices, he says.

“Because of recent clarifications made by the Global Foreign Exchange Committee about what kind of behaviour is and isn’t acceptable during last look, a lot of LPs have removed their additional hold times and so don’t have anything to hide within their reject codes anymore – such as trades being rejected because of a price movement within a prolonged period of time,” he says. “That’s definitely one of the reasons why LPs are more supportive of reject code standardisation today.”

Editing by Louise Marshall