By Ishita Misra
The foreign exchange (FX), or forex market for buying and selling currencies is the biggest financial market in the world. The past few years have witnessed numerous companies getting caught in scandals involving manipulation of the forex market. This has forced countries and international organisations to review the regulations in place.
The Global Foreign Exchange Committee (GFXC) is a committee of central bankers and experts working towards making the forex market more robust and transparent. The committee has recently adopted a global code of conduct called the FX Global Code. In order to improve its own financial sector and promote principles of good practice in the FX market, India will soon become a member of the committee.
The scandal and its aftermath
Until recently, the daily exchange rate was fixed based on the currency deals that took place 30 seconds before and 30 seconds after 16:00 hours, London time. As the rate was based on actual transactions that happened over a short period of time, there was a potential for people to collaborate and place orders within the 60-second time frame. If these orders were large enough, they could affect the calculation of the rate. This also implied profits for the traders.
The scandal broke out when it was discovered that traders from some of the biggest banks had been indulging in such malpractice through online chat groups. The monetary losses caused by the manipulation have been estimated to be $11.5 billion per year for 20.7 million pension holders in Britain alone. The scandal led to many banks getting fined billions of dollars. It also resulted in several traders around the world getting suspended or fired.
The forex market in India
The scandal was followed by extreme volatility in the forex market. The government and the Reserve Bank of India took various steps to stabilise the financial markets in the country. This included the compression of the demand for gold through a sharp reduction in the current account deficit and an increase in capital flows. This was also accompanied by policy measures such as market intervention and monetary tightening.
Since then, changes such as simplified operating procedures, the introduction of new instruments, and the liberalisation of exchange controls have allowed the market to grow and become more flexible. The forex market in India has developed a variety of instruments, increased participants, and increased the overall turnover. This has lead to an increased presence in the area of international trade and finance. Indias seat in the GFXC will further help in the development of a transparent forex market.
What will a global committee aim to achieve?
Due to the global nature of the market, any action will have a global impact. Thus, any efforts taken must be global as well. The Financial Stability Board (FSB) is an international body that monitors the global financial system and makes recommendations. The board has advised the G20 summit on what must be done to reduce the risk of misconduct in the financial sector. In this regard, actions must be taken to enhance standards and adherence in the markets. Establishment of the GFXC is one such action.
The committee will seek to promote communication and collaboration among local foreign exchange committees and areas with prominent forex markets. It will also act as a platform for exchanging views on market trends and developments. Moreover, the GFXC will be responsible for maintaining and updating the FX Global Code. The Code establishes guidelines for an FX market that is more robust, liquid, fair, open and transparent. It does so by covering topics such as transparency, governance, ethics, and information sharing.
Why is a stable forex market necessary?
The FX market is an integral part of the global financial market with a turnover of more than $5 trillion per day. However, the market has shrunk drastically post the instances of manipulation. This can be attributed to the general loss of faith in the market and the strict regulatory changes. The shrinking of the FX market has had severe impacts on both the global as well as individual economies. Due to its enormous size, the market contributes significantly towards the GDP of many countries. It is also responsible for the creation of several job opportunities. Therefore, a stable forex market is essential for economies to prosper.
By promoting more ethical and transparent practices through the Code, the GFXC can regain the lost faith in the market. The GFXCs function of acting as a platform for discussing market trends and developments can also help the market grow. By observing the impact of the regulations, the Code can be modified to ensure that these market regulations do not inhibit the growth of the market. Therefore, by performing these functions, the GFXC can be a huge stabilising force for the FX market.
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