Managing Informational Asymmetries in Foreign Exchange Markets

Abstract

The recent release of the FX Global Code of Conduct is an opportunity to revisit common market practices in global foreign exchange markets. These markets are critical to the functioning of the global economy, and provide robust solutions to the liquidity needs of both corporate and financial market participants. The bilateral nature of foreign exchange markets naturally leads to significant informational asymmetries between dealers and clients. These asymmetries serve to limit the adverse price risk for dealers and ensure deep liquidity availability. However, they can also lead to excess intermediation profits and inefficient price discovery. We identify three foreign exchange market practices where informational asymmetries are particularly relevant. In the spirit of the FX Global Code of Conduct, we suggest improvements that would further strengthen global foreign exchange markets.