Laura WilesPhilippe Lintern, head of BoE’s foreign exchange division, has delivered a speech on lessons learnt from the history of the FX market, at FX Markets Europe.
Lintern began by describing the success story of the market, with over $7.5 trillion of FX turnover daily, of which the London market accounts for around 40%. He noted the market’s resilience to disruptions such as COVID-19 or the recent CrowdStrike IT outage, but stressed that market participants and regulators should not be complacent.
The Global Foreign Exchange Committee (GFXC) is set to publish a revised version of the Global FX Code. Lintern drew attention to the the fact that take up of the Code is low in the hedge funds sector, despite its large, sophisticated participants. He said that in the absence of widespread adoption, the approach of the Bank of Mexico as current GFXC chair – to require relevant market participants to confirm their adherence, or otherwise justify their decision in writing – would become more appealing to central banks and regulators.
While take up of the Code is voluntary, Lintern urged those who have not yet signed up to do so, and those who have signed up, to re-attest to the incoming updated Code.
Lintern also highlighted the need for action to mitigate FX settlement risk – the risk of outright loss of the full notional value of a transaction due to a counterparty’s failure to settle – which was highlighted as a concern in market feedback ahead of the Code review, and is made more urgent by the global trend of shortening settlement cycles.
The speech urged market participants to review their FX settlement risk and adopt the best mitigation possible. The upcoming revisions to the Code clarify that each market participant has a responsibility for reducing FX settlement risk by reviewing their own practices, with Lintern stressing that this is not – as it may have been seen in the past – a solely sell-side issue.