Research Summary
The report discusses the transformation of the foreign exchange (FX) market, the largest financial system globally. It highlights the creation of the Global Foreign Exchange Committee (GFXC) and the introduction of the FX Global Code, which aimed to reduce the dominance of large dealer banks and enhance the strength of the global FX system. The report also covers the evolution of the FX market from the 1980s, its inefficiencies, and the impact of technological advancements on its transparency and efficiency.
Key Takeaways
Formation of the Global Foreign Exchange Committee
- Collaboration among Monetary Giants: In 2017, monetary authorities and global financial giants joined forces to form the GFXC, aiming to transform the FX market.
- Introduction of the FX Global Code: The GFXC introduced a set of recommendations, known as the FX Global Code, to enhance the strength of the global FX system and transform the market structure.
- Shift in Power: The FX Global Code aimed to reduce the dominance of large dealer banks in the FX market and introduce a new type of participant, challenging the longstanding status quo.
Evolution of the FX Market
- Dealer Banks’ Dominance: Since the 1980s, large internationally active banks have dominated the FX market, making the majority of markets in swaps, forwards, and spot FX.
- Market Structure: The FX market consisted of an interdealer (dealer-to-dealer) and dealer-to-customer segment, with the interdealer market exclusive to the dealer arms of the largest banking corporations.
- Market Activities: The everyday activities in the FX market included hedging currency risk, speculating, and offsetting trades executed with clients in the dealer-to-customer segment.
Technological Advancements in the FX Market
- Introduction of Electronic Brokerage Systems: In the early 1990s, the first electronic brokerage system was introduced by Reuters, leading to the creation of a rival system, the Electronic Broking Service (EBS), by dealer banks.
- Impact on Market Transparency and Efficiency: The introduction of electronic brokerage systems increased transparency in the FX market and enabled faster, more efficient trading.
- Growth of the FX Market: The FX market’s size and complexity multiplied due to technological advancements, forming the multi-trillion dollar currency giant known today.
Actionable Insights
- Understanding the FX Global Code: Stakeholders should familiarize themselves with the FX Global Code to understand the new guidelines and their impact on the FX market.
- Adapting to Technological Advancements: Participants in the FX market should adapt to technological advancements, such as electronic brokerage systems, to improve their trading efficiency and transparency.
- Exploring New Market Opportunities: With the shift in power from large dealer banks, new participants should explore opportunities to infiltrate opaque areas of the FX market.
