FX market practices need to improve, says Norway's wealth fund

According to a paper published by the fund, three elements could benefit from "greater transparency and verifiability"

Currency markets are less shaped by regulation than others. Thomas White / Reuters

The world’s biggest sovereign wealth fund is advocating for change in the way currency markets function to ensure both sides of trades have equal access to the information they need.

“FX markets are now the most liquid in the world, which is a significant achievement,” the Norwegian wealth fund said in a paper published on Friday. “However, the solutions have also tended to exacerbate the informational advantages enjoyed by dealers in bilateral, over-the-counter markets.”

Currency markets are less shaped by regulation than areas such as fixed income. Instead, participants are guided by the FX Global Code of Conduct. Norway’s $1 trillion wealth fund says the practices that currently steer currency trading need greater transparency and verifiability, which it sees as “key to mitigating the impact” of a lack of symmetry in information.

The fund identified three practices it says “particularly stand to gain from greater transparency and verifiability.” These include:

* Last Look

* The implementation of electronic algorithms

* The linkages between Request For Quote feeds and interdealer market prices

The fund said it wasn’t calling for any of the three categories to be abandoned, just improved.

“We believe that governance standards are a natural extension for the FX Global Code,” it said. “These would serve to further strengthen the well-functioning of this important market.”

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Norway’s sovereign wealth fund hit $1tn for the first time in September driven higher by climbing stock markets and a weaker US dollar.

“I don’t think anyone expected the fund to ever reach $1tn when the first transfer of oil revenue was made in May 1996,” Yngve Slyngstad, the chief executive of the fund said at the time. “Reaching $1tn is a milestone, and the growth in the fund’s market value has been stunning.”