Photographer: Tomohiro Ohsumi/Bloomberg

Norway's Wealth Fund Says FX Market Needs to Change

Updated on
  • Global currency markets generate $5 trillion in daily turnover
  • Norway wealth fund says it has identified key areas to target

Norway’s $1 trillion sovereign wealth fund is advocating for change in the way currency markets function to ensure both sides of trades have equal access to the information they need.

“FX markets are now the most liquid in the world, which is a significant achievement,” the Norwegian wealth fund said in a paper published on Friday. “However, the solutions have also tended to exacerbate the informational advantages enjoyed by dealers in bilateral, over-the-counter markets.”

The world’s currency markets generate more than $5 trillion in daily turnover, with spot transactions alone making up almost $1.7 trillion of that, according to the Bank for International Settlement’s triennial report.

The fund, based in Oslo, says the recent release of a global code of conduct for currency markets provides an opportunity to revisit assumptions on how trades are carried out. The investor warned of the risk of “significant informational asymmetries between dealers and clients” it says ought to be addressed. While existing practices help dealers avoid price risks and contribute to liquidity, “they can also lead to excess intermediation profits and inefficient price discovery,” the fund said.

Currency markets are less shaped by regulation than areas such as fixed income. Instead, participants are guided by the FX Global Code of Conduct. Norway’s wealth fund says the practices that currently steer currency trading need greater transparency and verifiability, which it sees as “key to mitigating the impact” of a lack of symmetry in information.

The fund identified three practices it says “particularly stand to gain from greater transparency and verifiability.”

  • Last Look
  • The implementation of electronic algorithms 
  • The linkages between Request For Quote feeds and interdealer market prices

The fund said it wasn’t calling for any of the three categories to be abandoned, just improved.

“We believe that governance standards are a natural extension for the FX Global Code,” it said. “These would serve to further strengthen the well-functioning of this important market.”

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