23 June 2020
The Global Foreign Exchange Committee (GFXC) discussed conditions in the foreign exchange market with its members, including how market participants are meeting the challenges posed by the current operating environment. In the period ahead, the GFXC will continue its review of the FX Global Code and focus on ways to strengthen the management of settlement risk in FX transactions.
On a teleconference with its members on 22 June, the GFXC discussed recent trading conditions in the foreign exchange market. The experience following the outbreak of Covid-19 was qualitatively similar to what occurred in previous severe market crises: spreads widened, volatility increased sharply, liquidity deteriorated for both spot and swap markets and funding costs surged in many currencies. FX flows relating to asset rebalancing, margin calls, liquidity withdrawals and hedging sparked increased demand for US dollars and the share of internalisation used by sell-side market participants decreased. However, what was notable about this latest crisis was both how sharply these measures deteriorated and how quickly they recovered following timely and decisive actions by central banks and governments around the globe. Though generally much improved, conditions were yet to fully normalise in all markets, including many emerging market currencies.
The GFXC also discussed recent trading conditions around FX benchmarks. Following the GFXC Statement on 26 March, the quarter-end benchmark fixings proceeded smoothly, although heightened volatility was observed at April month-end. The methodology for the WM/Reuters 4pm fix was discussed. GFXC members agreed that more public engagement from Refinitiv Benchmark Services Limited about their considerations for the benchmark’s methodology would be beneficial. The GFXC had discussed the WM/Reuters 4pm fix previously and will continue to do so on a regular basis.
At the same time – and consistent with Principle 9 of the FX Global Code – the GFXC noted that it was important for users of the 4pm fix to assess regularly whether executing at that time suited their requirements. The importance of Principle 10 of the Code was also highlighted: that charges set by market participants for handling fixing orders should be transparent and consistent with the risk borne in accepting these transactions.
The GFXC also discussed the operational challenges posed to industry participants by recent changes to working arrangements in many centres. Overall, participants felt that the transition had been smooth, with no major operational issues arising. The positive contribution of the FX Global Code was noted in several areas. Firstly, the Code helped in advocating for the adoption of robust operational and risk management practices by market participants. Secondly, the Code’s focus on increased transparency between market participants and improved disclosures helped participants better understand market conditions as those conditions deteriorated. Thirdly, the GFXC statement of 26 March highlighting market conditions ahead of quarter-end was a good illustration of the alignment of the industry at a global level that had been made possible by the Code. Looking forward, participants noted that they are actively planning within their organizations to ensure they can operate some elements of the current working arrangements on a longer-term basis. Considerations noted included the need to continue making progress on workplace flexibility, the importance of ensuring that new staff, and particularly new junior staff, are effectively trained outside of the traditional trading floor environment, and the need to ensure continued focus on strategic planning and medium-term change initiatives.
The GFXC’s review of the FX Global Code was paused following the outbreak of Covid-19. In the coming months, the GFXC will resume this work, with the aim of completing the review in the first half of 2021. Working groups are addressing the five focus areas of the review: buy-side engagement, anonymous trading, disclosures, algorithmic trading, and execution principles.
The GFXC also discussed the Bank for International Settlements’ 2019 Triennial Survey of FX markets which suggests that the proportion of trades being settled without payment-versus-payment protection may have increased. The amounts involved, and hence the risks posed, are potentially very significant, and require continued engagement from front and back offices in the FX market. In light of that, the GFXC and Local Foreign Exchange Committees (LFXCs) will consider ways to assist with gaining a better understanding of trends in settlement activity and with supporting the management and reduction of FX settlement risk, including reviewing the guidance in the Code.
Materials from the meeting, along with the minutes of the meeting, will be published in July.
For additional details on the GFXC and the FX Global Code, visit the GFXC website: www.globalfxc.org.
Press inquiries:
Cécile Lefort
Reserve Bank of Australia