The foreign exchange market (‘forex’ or ‘FX’) is not a centralized exchange like the stock markets, but rather it is an over-the-counter (‘OTC’) market – a global network of financial institutions and individual traders who trade currencies. Transactions in the forex market are typically large, involving millions and even billions of dollars. As such, it is important to identify who or what regulates its activity.
The governance of the foreign exchange markets can be divided into two areas: regulation and operational standards associated with trading activities (and placing orders). These two areas are commonly referred to as ‘rule-setting bodies’ and there are several which have authority in this domain. To read more, visit Remessa Online.
Rule-setting bodies which have an influence on the forex market include:
- The Bank for International Settlements (BIS)
- The International Organization of Securities Commissions (IOSCO)
- The Committee on Payment and Settlement Systems (CPSS) & Technical Committee of IOSCO
- The Foreign Exchange Working Group (FXWG)
- The Cobden Centre Currency Group (CCCG)
Participants in the Foreign Exchange Market
They can be split into two groups: those who buy and sell foreign exchange for their own commercial or investment needs and those who lend money to others by engaging in speculative activity.
The largest players on the market are commercial companies and central banks, while smaller players include tourists, retail buyers, speculators, and nonbank financial institutions. Commercial companies need foreign currencies to conduct business activities that involve buying or selling goods and services overseas, which requires payment in the local currency of its trading partner. Banks also help businesses set up operations overseas.
Central banks influence the supply and demand of currencies by adjusting exchange rates via buying and selling foreign currency reserves. Central banks intervene in the foreign exchange market as a way to keep their currency values stable or weaken when necessary through various policies including setting certain interest rates or intervening directly in the markets using their reserves.
Tourists also participate when they wish to buy goods or services while visiting a foreign country whose currency is different than their own domestic currency. Tourists then need to purchase a sufficient amount of that country’s currency by exchanging their domestic currency for native units at an establishment known as a moneychanger.
In contrast to tourists wanting a safe local form of payment for use during their travels, some traders buy assets for sale later at a profit because prices may have changed between trades due to supply/demand changes on global markets. Speculators tend to move quickly from volatile assets such as currencies so they can take advantage of trends before they dissipate which helps spur price movements by either sparking selling them on good news stories or buying them if bad news looms large on financial outlooks (e.g., economic indicators).
Types of Transactions
The first type of transaction is known as a spot transaction, and it involves the purchase or sale of two different currencies at current market rates. Spot trades are typically executed within two days, and they make up the majority of all forex trades.
The second type of transaction is called a forward transaction, and it involves entering into a contract to buy or sell one currency at some point in the future at an agreed-upon rate. This kind of transaction has the advantage of offering more certainty regarding when and how much currency will be exchanged but also carries inherent risk if the price moves in an unfavorable direction.
Regulatory bodies differ from country to country, but they all play an important role in ensuring the markets remain orderly. Let’s take a look at the regulatory bodies that govern the foreign exchange markets.
Bank for International Settlements (BIS)
The Bank for International Settlements (BIS), located in Basel, Switzerland, is an international organization created to promote international monetary and financial cooperation among its member countries, which include the foreign exchange market’s most important central banks and monetary authorities. The BIS provides liquidity to the financial markets and acts as a forum for exchanging information related to market developments and economic policies between central banks and other supervisory authorities.
The BIS serves as the secretariat for RMB Internationalization Working Group (RMB-IWG) meetings and publishes a quarterly publication called Central Bank Perspectives on RMB Internationalization that provides insights on the evolving role of the renminbi in global markets. The BIS also organizes seminars with central bank governors on different regulatory issues relevant to foreign exchange markets worldwide.
International Monetary Fund (IMF)
The International Monetary Fund (IMF) is an international organization that seeks to ensure financial stability, promote international trade, support economic growth, and improve global standards of living. The IMF plays a major role in the governance of the foreign exchange market by setting rules and regulations that all member countries must abide by. This includes, but is not limited to, rules for currency convertibility, capital adequacy requirements for banks and brokerages, and guidelines governing the flow of foreign direct investment.
Financial Action Task Force (FATF)
Financial Action Task Force (FATF) is an intergovernmental organization founded in 1989. It has members from over 200 countries and jurisdictions around the world, and it was set up to promote global standards to combat money laundering and the financing of terrorism. The organization sets out a series of recommendations or “Forty Recommendations” against money laundering, which are accepted by all its members. FATF is also responsible for developing global standards for combating the financing of terrorism, cooperating with international organizations in this field, and promoting the adoption of new measures to ensure the effective application of the Forty Recommendations.
The foreign exchange market is a decentralized global market and is regulated by an interconnected network of public and private entities. Nevertheless, the Bank for International Settlements serves as the leader in setting guidelines and standards. The BIS also encourages collaboration between central banks and other monetary authorities around the world in order to promote stability and financial continuity. Other organizations such as the World Bank, International Monetary Fund, European Central Bank, U.S. Federal Reserve System, and United Nations also have significant roles in governing and overseeing currency transactions on a global scale.