IGTA Journal - Autum 2020

Guy Debelle: The global foreign exchange committee and the FX global code Speech by Mr Guy Debelle, Deputy Governor of the Reserve Bank of Australia, at the FX Week Australia Webinar, virtual, 22 October 2020. * * * Thank you to FX Week for organising this event. Today, I will provide you with an update on the recent issues that the Global Foreign Exchange Committee (GFXC) has been considering as well as the state of play in the review of the FX Global Code. Conditions in Foreign Exchange markets The GFXC has met three times this year and each meeting we draw on the insights of FXmarket functioning from the 20 member Foreign Exchange Committees. This encompasses advanced and emerging economy FX markets and views from all parts of the market: sell-side, buy-side, non-banks and platforms. In FX markets, the experience following the outbreak of Covid-19 earlier this year was similar to what has occurred in previous market crises: spreads widened, volatility increased sharply, liquidity deteriorated for both spot and swap markets and funding costs surged in many currencies. These abrupt changes in market conditions can prompt rapid shifts in the structure of the market, such as the methods by which market participants execute their trades. For example, there was a reduction in the share of trade internalisation used by sell-side market participants and a greater share of activity migrated to the primary venues. However, one notable feature of this latest crisis was both how sharply market conditions deteriorated and how quickly they recovered. The actions by central banks and governments around the globe doubtless contributed to this rebound. By and large, conditions have continued to improve in recent months. Many indicators of liquidity are now approaching more normal levels, although the depth of market does remain noticeably below pre-pandemic levels. Conditions are more diverse in emerging market currencies, where more idiosyncratic factors tend to be in play, but overall, conditions have also generally improved in these markets but to a lesser extent. In periods of volatility, it is inevitable that there will be a greater focus on benchmark fixes . Large changes in asset prices and currencies generally mean that investors have greater-than-normal rebalancing flows when managing their portfolios. This was certainly the case at the height of market volatility in March. Ordinarily, a lot of these rebalancing flows will go through the market at times that match benchmark fixings. The GFXC drew attention to the possible consequences of these flows ahead of March quarter-end, cautioning market participants to always be mindful of the impact of their transactions and to clearly understand how their orders are being handled. Subsequent liaison suggested that market participants were attentive to the potential impacts. In some markets, participants looked to bring the timing of their flows forward of month-end. But while the fixings have generally proceeded smoothly, there have been occasions this year where the London 4pm fix has been associated with heightened volatility. This has prompted discussions – including amongst the GFXC and its member committees – about the fixing process. The GFXC is regularly engaging with the administrator of the WM/R fixes to relay any feedback from the committee and its members. I am encouraged by the increased engagement by them with market participants on the issues. At the same time, it remains as important as ever for users of the 4pm fix and other benchmarks 1 2 1 / 4 BIS central bankers' speeches IGTA eJournal | Autumn 2020 | 7

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