Revamping Forex Markets


Regulators across the globe are developing comprehensive procedures to ensure foreign exchange stakeholders don’t function inappropriately. They recommend “time stamping” of transactions and modifications to “last look,” a concept wherein market makers have a final opportunity to take/turn down orders if a client wants to trade with regard to a quoted price. Corporations would look for opportunities to receive the most optimal rate.

According to Guy Debelle, Assistant Governor of the Reserve Bank of Australia, “We are not trying to reinvent the wheel and we are not just harmonizing existing codes, but identifying gaps that need filling and explaining what we regard as good practice”.

It is estimated that banks across the globe have paid over $10 billion in fines and settlements pertaining to FX rate rigging functions.

According to David Gilmore, Partner and Economist at Essex, Connecticut – based Foreign Exchange Analytics, “This new global code of conduct is necessary and long overdue. Since the foreign exchange business crosses borders, it’s logical that it should operate under a global code of conduct”.

Unfortunately, there has not been an international agency to establish/impose regulatory reform. There have been several modifications that have impacted the Forex market in the recent past.

Normally, volumes in the Forex market were denoted by a concept – inter-dealer market (trading among dealers). However, as per the BIS Triennial Survey on foreign exchange market activity (2010), the maximum number of volumes disclosed by dealers was with regard to transactions with other financial institutions, which includes non-reporting banks, other financial institutions (institutional investors, hedge funds, proprietary trading firms and official sector institutions).

The fact that “other financial institutions” were responsible for over 50% of reported volume, while non-dealers managed greater volumes, reconfirmed the theory of a broadening in foreign exchange trading. The data interpreted that non-reporting banks accounted for 45% of the trading volume, while institutional investors, hedge funds, trading firms accounted for around 20%. Considering a market with trading volume in excess of $5 billion on a daily basis, it is further proof of the increase in participation by non-dealers in the Forex market.

A vital reason for an increase in the presence of non-dealers in the Forex market has been a relaxation in the rules of entry into the market due to an increase in the number of execution platforms and services. It has also been assisted by advancements in technology which have resulted in decreasing trading costs.

Electronic trading functions in Forex markets have also played a significant role. Technology is also contributing to stakeholder engagement by way of single and multi-dealer platforms.

For e.g., previously institutional customers were able to engage with the market through the dealing bank, but the interface between technology and prime brokerage along with the amalgamation of investor services (trade execution, settlement, financing, and custody) have resulted in direct connect with the inter-dealer market in ways that were not probable before. The capital investments required to bolster the technological changes have also increased.

The modifications in market structure are critical for the operation of the market, but market integrity depends on factors other than the capability to execute. It is mandatory that stakeholders functioning in the market perform as per relevant standards of ethics. There is scope for improvement in this domain in order to reconstruct the market integrity.

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