Remarks at the Next Step FX Event

February 08, 2023
Michelle Neal, Head of the Markets Group
Remarks at the Next Step FX Event, New York City As prepared for delivery

Thank you to the GFXD for inviting me to this event today.  It is an honor to join you to discuss market developments.

The FX market, with an estimated $7.5 trillion in average daily turnover, is the largest and most liquid financial market in the world. By enabling the efficient transfer of funds across borders, the FX market plays an important role in price discovery and facilitates transactions in goods, services, and financial assets.

As I reflect on my own personal career, two consistent themes emerge. First, an ongoing focus on driving and navigating the evolution of the financial markets and with an emphasis on emerging innovation and regulation; and second, the importance of partnering with dynamic and inspiring individuals, some of whom are in the room today. In my remarks, I will delve further into these themes. I will talk about how the FX market has been impacted by ongoing innovation and cross-border collaboration, how it might evolve, and the importance of best practices to support a well-functioning and efficient FX market. As always, the views I express today are my own, and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.

Evolution of the FX Market

Over the course of my career, I've seen firsthand how financial markets have grown and evolved on a global basis, having had the vantage point of being based in the UK and the US and managing teams and businesses that span no less than 13 global locations with different market characteristics, different cultures and different regulatory regimes. Trading in major financial markets, much as the rest of our day to day lives, has been dramatically impacted by digital forces and electronification over recent decades.  Like most assets classes, trading in the FX market was traditionally dominated by transacting over the phone and post trade procedures conducted by fax.  Today, it's fair to say that FX has led the way in electronification for non-equity products, utilizing a range of platform types and protocols. Participation in the FX market has also broadened considerably. Whereas the market was previously dominated by banks and bank-affiliated dealers, "other financial institutions"—a category that includes non-reporting banks and other kinds of financial institutions, such as institutional investors, hedge funds, and proprietary trading firms – are significant contributors to liquidity in the market. This change has been partly driven by technological advancements, which have reduced barriers to entry and trading costs and increasing the speed with which transactions take place.

While nothing is certain, I think it is fair to state that the FX market will continue to evolve, in both expected and unexpected ways. We might see much shorter settlement times—potentially moving from T+1 or T+2 to instant and autonomous settlement. Further electronification of the FX market could bring greater efficiency, more customized client services, greater competition, and potentially better pricing and liquidity for consumers. As certain barriers to entry are lowered further, we could also see even more diversity in the types of liquidity providers in the FX space. A more diverse set of players would allow for firms with different comparative advantages to operate in the space.

We could also see the introduction of central bank digital currencies (CBDCs) in some jurisdictions. Central banks are now starting to innovate by building expertise and investing in technology to examine the potential applicability of CBDCs. Some of the work currently underway includes wholesale-focused experiments by the BIS Innovation Hub's Project Helvetia and Project Jura, which have explored settlement of tokenized assets and foreign exchange transactions in CBDC.

While the Federal Reserve has made no decision on whether or how to issue a CBDC, we are actively conducting research and technical investigations into both retail and wholesale CBDC designs to improve our understanding of the risks and opportunities inherent to a U.S. dollar CBDC.

Our Role in a Rapidly Changing Market

In global financial markets where the speed and scope of innovation is increasing, how do we think about the role of the Federal Reserve?  Through the recently created New York Innovation Center (NYIC), we are collaborating with a range of market players to generate insights into implications of these new technologies for central banks, enabling stakeholders and the central bank community to enhance the functioning of the global financial system. Established in 2021 as a strategic partnership with the Bank for International Settlements, the NYIC partners with experts across the Federal Reserve System, academia, and the public and private sectors on technical research, experimentation, and prototyping.

The NYIC's inaugural project, Project Cedar, zeroed in on two of the topics I mentioned earlier: the settlement of FX transactions and CBDCs. As a first area of investigation, Project Cedar considered FX spot transactions, which are critical in the context of cross-border payments, and serve as a building block for longer, more complex transactions. By demonstrating that a CBDC facilitated by a modular ecosystem of ledgers could provide improvements in settlement time of FX spot transactions, phase one of Project Cedar shed light on ways that distributed ledger technology might improve speed and access and reduce risk for the broader cross-border market.

For the second phase of Project Cedar which is currently underway, the NYIC partnered with the Monetary Authority of Singapore to investigate modes of interoperability between CBDC ledgers to facilitate a more complicated transaction: a multi-leg, cross-border, cross-currency payment. By investigating this, the NYIC seeks a better understanding of a future that may include a CBDC-based FX market. We plan to publish the findings of the phase two experiment in the coming months. Ongoing research and experimentation, in collaboration with a range of financial market participants, will be the key to ensuring that markets continue to evolve responsibly in order to safeguard the stability of the global financial system.

The Role of the FX Global Code

Taking a step back, regardless of where innovation takes us, it will be important to collaborate across markets and international borders. Given the central role of the FX market in the global economy, a well-functioning and efficient FX market is critical. To support this, we at the New York Fed have, for many decades, actively partnered with market participants through our sponsorship of the Foreign Exchange Committee (FXC), an industry group that works to promote an FX market that is robust, fair, liquid, open, and appropriately transparent.

In recent years, we've reinforced this work at a global level through our participation in the Global Foreign Exchange Committee (GFXC)—a forum comprised of both public and private sector representatives--and the establishment of the FX Global Code. The FX Global Code is a set of principles that play a pivotal role in upholding the conditions for an open marketplace where diverse participants can operate in a fair and transparent way. Market participants demonstrate their commitment to the Code and good practices in the wholesale FX market by publishing a signed statement of commitment. The Code challenges organizations to think critically about their role in the market and places a spotlight on the importance of good conduct. It also serves as an international benchmark against which firms can assess not only their own internal practices, but also those of their FX counterparties, platforms, and vendors. We, ourselves, have signed a statement of commitment to the GFXC Global Code to show our commitment to these ideals.

As the FX market evolves over time, it is vital that the Code adapts along with it. In July of 2021, the GXFC completed its first comprehensive review of the Code since it was launched in 2017. Critical to this process was input from the full spectrum of market participants – including buy-side contributions from asset managers, hedge funds, and corporations. The updated Code further promotes disclosures and transparency and introduced debate on important topics resulting in the advancement of good practices, including how to best reduce settlement risks within the FX market.  In this environment of rapidly changing financial markets, the Code will be revisited and revised every three years to ensure that it remains fit for purpose amidst ongoing innovation.


Innovation is by its very nature both exciting and daunting, as rapid changes present both opportunities and risks. Looking back to the inception of digital innovation in markets, I might have found it hard to believe we would have come this far so fast. We now have a market and financial system that is faster, more robust, and more inclusive than ever before. Through close partnerships across the full spectrum of market participants, we can continue to harness and channel innovation to further strengthen financial markets and the global economy.

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