Norges Bank Investment Management, which manages the giant NOK8.2 trillion ($1 trillion) Government Pension Fund Global, has aligned its internal practices with the FX Global Code of Conduct. The code is a set of global principles, released this year, for good practice in the foreign exchange market. NBIM is encouraging, and expecting, its counterparties to follow it as well.
NBIM also states, however, that uptake of the code won’t change a number of unique features of foreign exchange markets that provide scope for rent extraction by dealers, where they are more than compensated for the risks they take in providing liquidity. So, while the code provides a strong foundation for global FX markets – which with an estimated daily turnover of $5.1 trillion are the most liquid in the world – there is plenty of room for improvement in practices.
A new “Asset Manager Perspective” paper by NBIM outlines three industry practices that are particularly problematic, arising from systematic informational asymmetries:
- The first is “last look”, which is a device in FX spot markets to deal with the instantaneous price risk of stale quotes
- The second concerns the implementation of algorithmic execution strategies, a way of sharing the temporal price risk between client and dealer
- The third is an apparent disconnect between dealer quotes and prevailing prices in the inter-dealer market.
The paper also outlines ways of managing these informational asymmetries.