The forex markets in the Americas have seen a relatively moderate stress levels in the recent years, according to a report by the Bank for International Settlements (BIS). Forex liquidity has declined during certain episodes of market stress, such as the Swiss franc (CHF)-related crisis in early 2015.
“While FX markets have continued to function without major disruptions, stresses to the financial system have been relatively limited in recent years, suggesting that how FX markets deal with shocks has not yet been fully tested,” according to the report.
According to the report, certain fines and regulatory requirements are stopping some dealers from engaging in discretionary trading activities. As a result, large bank dealers are shifting more of their market-making activity from the open forex market into their own internal markets. However, the impact of post-crisis regulatory changes on forex market liquidity remains unclear.
“In particular, the impact of regulation on bank behavior to discourage risk-taking in the FX market is uncertain, as the characteristics of FX markets differ from those of other market segments,” the BIS noted.
Forex volatility in stressed market conditions has been affected by use of technology in trading. Technology has played a major role in liquidity dynamics and has added to forex volatility. These elements are particularly evident in global forex markets, including in the USD and CAD, but are also present in Latin American currency markets. Moreover, the use of technology has helped enhance liquidity in normal conditions and offsett the impact of market fragmentation.
Switzerland-based BIS, set up in 1930, is the world’s oldest international financial organization, with 60 member central banks, representing countries from around the world that together make up about 95% of world GDP.