What Are the Core Fx Global Code Principles Governing Last Look Practices? ▴ Question

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Concept

When your institution requests a price in the over-the-counter foreign exchange market, you are engaging with a decentralized network of liquidity providers. The price you receive is a commitment, yet it is a commitment conditioned by the operational realities of a market without a central clearinghouse or a single, unified order book. The mechanism of ‘last look’ is a direct architectural consequence of this decentralized structure.

It functions as a final, conditional risk-management gate for the market participant, typically a liquidity provider (LP), who receives a request to trade. This practice grants the LP a brief window of time to verify the validity of the trade request and to check the submitted price against the current market before committing capital and accepting the trade.

The operational necessity for this practice arises from the inherent latency and information asymmetry in a non-centralized system. An LP may stream indicative quotes to numerous clients simultaneously. Without a final verification step, the LP would be exposed to significant risks, including latency arbitrage, where a fast actor could trade on a stale price, or the risk of multiple clients attempting to execute on the same quote simultaneously, exceeding the LP’s intended exposure.

Last look is the system’s answer to this structural vulnerability, a protocol designed to ensure that the transaction agreed upon is still viable for both parties at the moment of execution. It is a risk control intended to confirm the operational parameters and price consistency of a trade request before final acceptance.

The core function of last look is to serve as a final risk control for a liquidity provider before accepting a trade in the decentralized FX market.

Understanding this mechanism is foundational to navigating the FX market effectively. It is a protocol that directly impacts execution quality, and its application varies significantly between liquidity providers. The FX Global Code does not prohibit last look; instead, it establishes a rigorous framework of principles designed to govern its use, ensuring it functions as a legitimate risk management tool while preventing its misuse.

The principles aim to standardize the practice around transparency and fairness, transforming it from an opaque variable into a disclosed and understandable component of the trade lifecycle. The Code’s intervention seeks to balance the LP’s need for risk mitigation with the liquidity consumer’s (LC’s) right to fair and transparent execution.

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Strategy

The application of last look is a defining element of a liquidity provider’s strategic offering and a critical point of due diligence for any liquidity consumer. The FX Global Code pushes this strategic calculus into the open by mandating transparency, allowing market participants to make informed decisions based on the disclosed methodologies of their counterparties. The strategic deployment and evaluation of last look practices revolve around risk management, execution quality, and information control.

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Liquidity Provider Strategy

For a liquidity provider, the last look window is a primary defense mechanism. The strategy is not simply about having a last look window, but about how it is configured and applied. This configuration directly reflects the LP’s risk appetite and technological capabilities. The two core components of this strategy are the validity check and the price check.

The Validity Check ▴ This is a procedural control. It confirms that the transaction details are operationally sound and that sufficient credit is available for the client. This is a standard and uncontroversial part of the process.
The Price Check ▴ This is the more complex and strategically significant component. The LP compares the client’s requested price against its current internal reference price. The key strategic decision is the methodology for this check.

The choice between a symmetric and asymmetric price check is a fundamental strategic differentiator, with significant implications for the client’s execution outcomes.

Table 1 ▴ Comparison of Price Check Methodologies
Methodology	Description	Strategic Implication for LP	Impact on Liquidity Consumer
Symmetric Application	The LP applies the same price tolerance level on either side of its current reference price. If the market moves outside this tolerance band, the trade is rejected, regardless of whether the movement favored the LP or the LC.	Positions the LP as a neutral risk manager. Builds trust by demonstrating fairness. May result in rejecting trades that would have been profitable for the LP.	Provides a more predictable execution experience. Rejections are based purely on market volatility, not on the direction of price movement.
Asymmetric Application	The LP applies different tolerance levels. Typically, trades are accepted if the price moves in the LP’s favor but are rejected if the price moves against the LP beyond a certain tolerance.	Maximizes the LP’s profitability on a per-trade basis by capturing favorable price movements while rejecting unfavorable ones. This strategy can damage client trust if not disclosed transparently.	Leads to a higher probability of rejection when the market moves in the LC’s favor (i.e. the price they could have gotten has improved). This is often perceived as unfair and is a key source of contention.

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Liquidity Consumer Strategy

For a liquidity consumer, the primary strategy is one of evaluation and selection. The goal is to partner with liquidity providers whose last look practices align with the consumer’s execution objectives. This requires a quantitative and qualitative assessment of LP behavior.

A liquidity consumer’s strategy involves rigorously evaluating LP disclosures and execution data to select partners that offer fair and predictable last look practices.

The FX Global Code empowers this strategy by insisting on clear disclosures from LPs. An effective LC strategy involves analyzing the following:

Reviewing Disclosures ▴ The starting point is the LP’s disclosure statement. The Code recommends specific disclosures that LCs should demand and scrutinize.
Transaction Cost Analysis (TCA) ▴ LCs must go beyond disclosures and analyze their own execution data. Key metrics to monitor include rejection rates (especially around market-moving events), the hold time (the duration of the last look window), and the market movement post-rejection. Unusually high rejection rates or consistent negative market movement after a rejection from a specific LP are red flags.
Diversification of Liquidity ▴ Relying on a single LP, especially one with opaque or aggressive last look practices, creates significant execution risk. A robust strategy involves diversifying across multiple LPs with transparent and fair practices.

The following table outlines the critical information an LC should seek from an LP’s disclosures, as guided by the principles of the Code.

Table 2 ▴ Essential LP Disclosures on Last Look
Disclosure Area	What Should Be Disclosed	Why It Is Strategically Important for the LC
Price Check Methodology	Whether the price check is applied symmetrically or asymmetrically.	This is the most critical factor in determining the fairness of the process. Asymmetric application can systematically work against the LC.
Last Look Window Duration	The expected or typical minimum and maximum length of the hold time.	A longer hold time exposes the LC to more market risk. Unpredictable or excessively long hold times are a sign of poor practice.
Purpose of Last Look	A clear statement that last look is used solely for price and validity checks.	Confirms the LP’s adherence to the spirit of the Code and that the practice is a risk control, not a profit-generating mechanism.
Handling of Rejected Trades	The treatment of confidential information from rejected trade requests.	Ensures the LC’s trading intent is not being used by the LP after a rejection, mitigating the risk of information leakage.

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Execution

The execution of last look practices is governed primarily by Principle 17 of the FX Global Code. This principle provides a clear operational playbook for market participants, establishing firm boundaries for acceptable conduct. The core directive is that last look, if utilized, must function exclusively as a risk control mechanism. Its application must be transparent, fair, and consistent with the disclosures provided to clients.

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Principle 17 a Detailed Breakdown

Principle 17 is not merely a guideline; it is a detailed set of instructions for the proper implementation of a last look process. Adherence to these instructions is the measure of a market participant’s commitment to the Code’s ethical and operational standards.

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The Mandate for Transparency

The foundational requirement of Principle 17 is transparency. A market participant employing last look must provide clear and sufficient disclosures to its clients. This is not a passive requirement.

The disclosures must be comprehensive enough for a client to make an informed decision about the execution services being offered. At a minimum, these disclosures must explain:

How price changes in either direction (favoring the LP or the LC) will impact the decision to accept or reject a trade.
The expected or typical duration of the last look window.
The overarching purpose for which the market participant uses last look.

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Permitted Use a Risk Control Mechanism

The Code is unequivocal about the legitimate function of last look. It is to be used for two specific checks only:

A Validity Check ▴ To confirm the operational details of the trade request (e.g. settlement instructions, notional amount) and to ensure sufficient credit is available.
A Price Check ▴ To confirm that the price at which the trade was requested remains consistent with the current price available to the client.

Any use of the last look window for purposes beyond these two checks is a violation of the Code’s principles. This includes using the window to observe market movements for proprietary trading advantage or for any other strategic purpose unrelated to the risk management of the specific trade request.

Under the FX Global Code, last look must be executed as a transparent risk control, with strict prohibitions on using client information for proprietary trading during the hold window.

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Prohibited Activities within the Last Look Window

Principle 17 establishes critical prohibitions on activity during the last look window to protect the client from being disadvantaged. These are among the most forceful directives in the entire Code.

A market participant must not engage in trading activity that utilizes the information from the client’s trade request during the last look window. This prohibition is designed to prevent two specific harmful behaviors:

Information Leakage ▴ Hedging or other trading activity based on the client’s request, before that request is accepted, can signal the client’s intent to the broader market. If the trade is subsequently rejected, the client has been harmed by this signaling, as the market may have moved against them based on information from their own confidential request.
Unfair Use of Confidential Information ▴ A trade request, from the moment it is received, constitutes confidential information. Using this information for any purpose other than evaluating the trade itself is a misuse of that information. If an LP hedges a trade during the last look window and then rejects the client’s request, the LP has used the client’s information for its own benefit without completing the transaction for the client.

The only exception to this rule is a pre-disclosed “Cover and Deal” arrangement, where there is an explicit, documented understanding with the client that the LP will fill the trade request by first executing offsetting transactions in the market. In such cases, the full volume of the hedge must be passed on to the client.

How should a liquidity provider’s actions be evaluated under Principle 17? The following table provides a clear guide.

Table 3 ▴ Operational Dos and Don’ts of Last Look Execution
Action	Compliant with FX Global Code (Do)	Non-Compliant with FX Global Code (Don’t)
Purpose	Use the window solely to check the price and validity of the specific trade request.	Use the window to gather information on client flows or to wait for favorable market moves.
Transparency	Provide clear, ex-ante disclosures on price check methodology and window duration.	Maintain opaque or ambiguous policies regarding how and when trades are rejected.
Hedging	Refrain from any hedging activity related to the trade request until after the trade has been accepted.	Hedge the trade request during the last look window before deciding to accept or reject it (unless under a ‘Cover and Deal’ agreement).
Information Use	Treat the trade request as confidential information to be used only for the purpose of the trade.	Use information from a rejected trade request as an input for other trading decisions.
Decision Time	Make the accept/reject decision promptly and without undue delay.	Introduce additional, artificial delay into the last look window to observe market movements.

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References

Global Foreign Exchange Committee. “Execution Principles Working Group Report on Last Look.” August 2021.
Global Foreign Exchange Committee. “FX Global Code.” July 2021.
The Investment Association. “A Guide to the FX Global Code for Asset Managers.” 2019.
Ramaswamy, S. & C. A. Lehalle. “Optimal Quoting in an OTC Market with Search Frictions.” Market Microstructure and Liquidity, vol. 3, no. 1, 2017.
Financial Stability Board. “Foreign Exchange Benchmarks ▴ Final Report.” September 2014.

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Reflection

The principles governing last look within the FX Global Code provide more than a set of rules; they offer a blueprint for a more stable and transparent market architecture. By integrating these principles into your own operational framework, you are not simply ensuring compliance. You are actively participating in the evolution of the market’s structure. The Code encourages a continuous dialogue between liquidity providers and consumers, a dialogue predicated on clear disclosures and verifiable data.

How does your current evaluation process for liquidity providers measure up to this standard? Are you leveraging the transparency mandated by the Code to forge stronger, more reliable execution relationships? The ultimate advantage in this market will belong to those who can best integrate these principles of fairness and transparency into their core strategic and operational systems.