The Bank for International Settlements’ (BIS) annual review contains a detailed analysis of the events in FX that took place in the run up and aftermath of the turmoil that has stalked financial markets since August 2007. As most readers of this column are market participants, there is nothing that new to be found in the review and its value is more as a document of record for future FX watchers.
However, it is a good read and it finishes by trying to take a longer-term perspective on how FX will develop. It highlights that as FX has expanded, it has attracted a whole new range of particpants, which at times has been accompanied by improvements in risk management. These changes, it points out, has improved the overall resilience of the market. “The continued expansion in turnover, to the extent that it is structural, is likely to have added further to market liquidity, strengthening the market’s ability to absorb large individual trades smoothly without a significant impact on prices. At the same time, the increased diversity of participants, and the associated heterogeneity of opinion that this might be expected to engender, may have contributed to greater market depth. Finally, the reduction of credit exposures generated in the course of the clearing and settlement of interbank foreign exchange contracts is likely to have helped preserve market participants’ willingness to enter into transactions, and thus to have provided further depth to the market,” the report states.
However, BIS warns that, “these developments notwithstanding, there are reasons to maintain vigilance in monitoring developments in foreign exchange markets and to sustain the impetus for better risk management practices.” The full report can be found here: http://www.bis.org/publ/arpdf/ar2008e5.pdf