3.2. MAJOR MARKETS FOR FOREIGN EXCHANGE 89
Figure 3.7:The Bank of International Settlements (BIS)
The Bank for International Settlements (BIS) is
commonly described as the bank of the Central
Banks. It was first set up after WW1 to act as a
payent agent distributing the German and
Austrian war reparation payments. After WW2 it
ran the European Payment Union (EPU), serving
as a netting institute for payments among EPU
members. By netting the international payments,
the volume of actual payments was reduced,
which alleviated the problems of dollar shortages
in the first years after the war. Currently, the BIS
still is the bank of the central bankers: all central
banks have accounts there, in various currencies,and can route their payments to each other via the
BIS. But nowadays the BIS mainly serves as a
talking club for central bankers and regulators.
One of its missions is to gather data on exchange
markets, euro- and OTC-markets, new financial
instruments, bank lending to sovereign borrowers,
and so on. Another mission is to provide a forum
where regulators coordinate the capital adequacy
rules that they impose on financial institutions.
The Basel-1 rules covered credit risk—in a crude
way, perhaps, but it was a useful first step; the
recent Basel-2 rules refine Basel-1 and add market-
price risks, see the chapter on Value at Risk.wider.
Note that the advent of these multilateral systems has made the market somewhat
more like an organized market: there is centralization of buy and sell orders into
one matching mechanism, there are membership rules (not anyone can log on into
the program), rules about orders, etc. But the exchange market is still fully private,
whereas many exchanges are semi-official institutions that are heavily regulated and
need, at least, a license.
Brokers
A last way of shopping around in foreign exchange markets is through currency
brokers. In the telephone-market days, brokers used to do the middleperson stuff
that nowadays is handled via limit-order books: on behalf of a bank or company, the
broker would call many market makers and identify the best counterpart. Roughly
half of the transaction volume in the exchange market used to occur through brokers.
Nowadays, brokers are mainly used for unusually large transactions, or “structured”
deals involving, say, options next to spot and/or forward; for bread-and-butter deals
their role is much reduced.
3.2.2 Markets by Location and by Currency
Every three years, in April, the Bank of International Settlements (see box in Figure
3.7) makes a survey of the over-the-counter markets, including forex. At the latest
count, April 2007, the daily volume of trading on the exchange market and its
satellites—futures, options, and swaps—was estimated at more thanusd3.2 trillion.
This is over 45 times the daily volume of international trade in goods and services, 80
times theus’ dailygdp, 230 times Japan’sgdp, and 400 times Germany’sgdp, and