THE FX MARKET STRUCTURE'S EVER-EVOLVING LANDSCAPE

The following information was released by the Federal Reserve Bank of New York:

Anna Nordstrom, Head of the Markets Group

Keynote Address at the 2025 FX Market Structure Conference, Federal Reserve Bank of New York, New York City As prepared for delivery

Introduction

Good morning, and welcome to the New York Fed.

I am pleased to see industry and thought leaders coming together today for our second annual Foreign Exchange (FX) Market Structure Conference. I look forward to building upon the success of the inaugural event and to continuing our dialogue around the evolving structure of this very important market.1 It took a lot of behind-the-scenes work to put this conference together, and I want to thank everyone who made it possible.2

With over $9 trillion in daily turnover, the FX market is the largest financial market by trading volume.3 I think of it as the circulatory system for global financial markets and the global economy. This market plays an essential role in supporting the flow of cross-border trade, investment, and finance. It facilitates important risk management. It also supports the smooth transmission of monetary policy. As such, it is critical that households, corporations, and financial institutions can access and transact in an FX market that functions effectively and efficiently.

Today, Ill begin by briefly discussing the New York Feds role in the FX market. Then, Ill look back at some of the dynamics that influenced FX trading this year. And Ill look ahead to the innovations in technology that are expected to come into play in the near term.

Before I go further, I want to note that the views I express today are my own and do not necessarily reflect those of the Federal Reserve Bank of New York or others in the Federal Reserve System.

Our Unique Role

The New York Fed has a unique role in the Federal Reserve System. The Open Market Trading Desk implements monetary policy on behalf of the Federal Open Market Committee (FOMC) and monitors financial market developments.4 The New York Fed also participates in the FX market at the direction of the FOMC and the U.S. Treasury. It conducts FX transactions for official sector account holders and manages international dollar liquidity facilities.

Given this mandate, it is critical that we have a deep understanding of the factors that drive the structure and function of the FX market, so that we can most effectively carry out our responsibilities, support policymaking, and promote good market practices.

A Year in Review

In looking back at the events of 2025, I think we can all agree that its been a busy year for markets. Ill start by briefly highlighting some notable events.

The Role of Global Asset Allocation

First, attention to macroeconomic events returned FX spot and derivatives markets to the forefront. This was particularly true regarding trends in global asset allocation amid heightened uncertainty in U.S. trade policy. In this context, market participants remain attuned to whether there are ongoing material shifts in the U.S. dollars share within global portfolios.

While available data show little evidence that foreign-denominated asset allocation has changed, fund managers have discussed the potential for reducing dependence on U.S.-dollar-denominated assets in the longer run. Still, many have noted that there are few current alternatives to U.S. assets that offer similar liquidity and market depth. Fund managers have also noted that higher relative returns offered by U.S. assets are discouraging diversification away from the U.S. dollar in global currency and asset allocation.

Hedging Activity and the BIS Triennial FX Survey

Hedging activity is another relevant theme this year. Some global fund managers increased the FX hedge ratios of their U.S. asset holdings, particularly amid the notable dollar depreciation in April. This comes following an environment over recent years where hedge ratios have been reportedly stable at historically low levels.

These anecdotal reports are echoed in the results of the BIS Triennial Survey, which measured activity over the course of April and offers some evidence of potential adjustments to global investor hedge ratios.

The BIS Triennial Survey showed a 42 percent increase in spot FX activity since 2022. And there was an even larger volume increase for forwards and options, which were up 60 percent and 109 percent, respectively. While it is difficult to show a direct link from these data, the sharp increase in these products compared to previous surveys is consistent with an increase in FX hedging activity back in April. I am eager to hear the perspectives of our panelists on these and other FX trading dynamics in our first discussion of the day.

FX Markets Resilience amid Elevated Volatility

Given the various factors at play and the fundamental significance of the FX market, it is important to examine how periods of elevated volatility may impact market functioning.

There were multiple periods of volatility over the course of the year, and a particularly acute episode in April tested the resilience of the FX market. The market withstood those pressures, as evidenced by fairly stable bid-ask spreads, market depth, and price impact measures. Trading volumes on primary platforms also increased notably, as is typical during highly volatile periods.

This period of increased volatility renewed market attention on the implications of the decentralized execution landscape for the quality of liquidity and price discovery. I imagine there are varying views, even across this audience, on how to assess those implications. You will hear some of those perspectives today.

It is essential that the structure of the market can accommodate a diverse set of market participants in reliably executing transactions, even amid periods of heightened volatility. The market is not one-size-fits-all.

Looking Forward and t he Role of Advances in Technological Innovation

Looking ahead, innovation will remain an important factor in the evolution of FX market structure. Some key technological advances, which could have a range of impacts, may affect both the overall structure of the FX market and how FX trades.

For example, artificial intelligence (AI) may increasingly be used to enable more efficient workflows, including automated trading strategies like algorithmic-based execution. This could lead to an even greater reduction in average trade sizes as large orders would be more efficiently split into numerous smaller transactions. Although AI-supported algorithmic-based execution could minimize market impact, it could potentially increase opaqueness and impact the ability to identify emerging risks.

Modernization in payments, increased usage of stablecoins, and transfers of tokenized deposits across jurisdictions may affect FX trading processes by accelerating the speed of trading and extending liquid trading hours of the FX market. Yet, faster trading and longer trading hours may increase liquidity risks and volatility in the FX market.

To better understand these advances and their implications, the New York Innovation Center5 at the New York Fed conducts research and analysis on new financial technologies. The New York Fed also sponsors the U.S. FX Committee6 and regularly engages with the Global Foreign Exchange Committee (GFXC)7 about market structure evolution. Given the importance of technological innovation in FX markets, we have dedicated a panel today to this topic. Im interested to hear panelists views on which innovative technologies they expect will make the greatest impact over the next few years.

The FX Global Code

Finally, I would be remiss not to highlight the GFXCs recent update of the FX Global Code.8 This is near and dear to my heart, as I have been involved with the Code since its 2017 launch.

The Code is a set of global principles that promote integrity and effective functioning of the FX market, and the New York Fed and other central banks partner with the industry in support of these principles. As we talk about the various forces that have been shaping market structure, as well as the changes we see ahead, it is important to ensure that the principles of good practice remain up to date and fit for purpose. For this reason, the GFXC is strongly committed to regular reviews of the Code.

The most recent updates strengthened guidance on mitigating FX settlement risks and recommended increased transparency around certain types of FX transactions and client-generated data. As part of this effort, the New York Fed worked closely with industry members on the U.S. FX Committee, and I want to thank all membersmany of whom are here todayfor their valuable contributions and their support in promoting good market practices. I am looking forward to hearing from buyside firms about their views.

Conclusion

Before we go to the first panel, I want to take this moment to thank all of you for being here. This event is an important forum for convening people with different perspectives and expertise to help us better understand the past, present, and future of this critical market. Already, it is exciting to see how this annual conference has grown from last year.

I look forward to hearing from all of you over the course of the day, and I hope you enjoy the conference.

1 Dan Reichgott, Fabiola Ravazzolo, Lisa Chung, and Alain Chaboud, The FX Markets Evolution in Focus at 2024 Conference, Federal Reserve Bank of New York The Teller Window, February 6, 2025.

2 I would like to thank Lisa Chung, Dan Reichgott, and Fabiola Ravazzolo for their assistance in preparing these remarks, and to the rest of the organizing committee including Martin Prusinowski and Subrina Lashenko for their work on helping organize the conference.

3 BIS Triennial Survey

4 Roberto Perli, Market Intelligence and the Monetary Policy Process, Roberto Perli, Remarks at the Deutsche Bundesbank Representative Office New York, September 24, 2024

5 New York Innovation Center

6 Foreign Exchange Committee

7 Global Foreign Exchange Committee

8 FX Global Code

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