BIS Warned the Forex Market against Possible Liquidity Crunch

Bank of International Settlement (BIS) recently issued a warning to the forex market, saying that the proliferation of forex platforms and investment channels has led to a greater dispersion of capital, which can increase the risk of liquidity crunch for some forex brokers in times of high market volatility. Though JP Morgans latest global forex volatility index is at a record low since 2014, the forex market faces new risks as signs of fluctuation emerge.

When under pressure, forex brokers might ration liquidity and prioritize the clients who are more closely associated with them, such as those that stick to their single-bank platform, while those trading across platforms could experience serious liquidity evaporation. BIS estimates around US$9 trillion of forex payment faces such risk per day, and as instant-market-crash become more frequent recently, the exchange rates can experience significant ups and downs out of established trading ranges in just minutes, even seconds.

The pound sterling once experienced such flash crash in October, 2016 plunged to its lowest in 30 years; another example is the Swiss Franc which fell drastically against the Euro in January, 2015 due to sudden cancellation of the cap on CHFs value against EUR.