The foreign exchange market regulation of the foreign exchange market regulation of the way

From the perspective of financial regulation economics and other theories, appropriate regulation is important. Regulation is nothing more than a special product provided by the government in the market, which should work through the market mechanism. There are also failures of government. While regulation brings benefits, it also incurs certain costs, so it is necessary to consider the matching of benefits and costs. As far as the foreign exchange market is concerned, the key question is not whether or not the regulator should be involved, but how the regulator should be involved. The foreign exchange market is a highly self-regulating OTC market, and self-regulation provides a good micro-foundation for external regulation, so it is important to deal with the relationship between the regulator's behavior and the industry's self-regulation. Regulatory authorities are mainly responsible for or involved in the development of market management system, operating rules, credit system, supervision of market operation compliance, prevention of illegal and manipulative behavior of foreign exchange transactions, and maintenance of normal foreign exchange market order, but do not intervene in normal transactions. Industry self-regulation mainly includes the formulation, implementation, evaluation and compliance supervision of code of conduct, etc. The regulatory authorities participate in the process of industry self-regulation through appropriate means. The rules of conduct document the spirit, practice, etiquette, etc. regarding foreign exchange capital transactions, and prevent disputes and accidents in the foreign exchange market by subjecting the parties to the transaction to uniform or standardized rules. Rules of conduct are authoritative statements on certain areas of operation, generally only provide guidelines without requirements, which is the main difference between rules and laws. Of course, some mandatory provisions can be added when necessary. Usually cited are the rules set by the Bank of England and those set by the Committee on Foreign Exchange Practices, which is supported by the Federal Reserve Bank of New York. But headquartered in Paris, the world's foreign exchange club (CIA) in the countries involved in the "rules of conduct", in 1991 to reformulate the "rules of conduct" is particularly noteworthy. These rules of conduct reflect the trading practices and development process of each market, although there are some differences, but the rules themselves conflict with each other in very few places, because the rules of conduct itself is to record the market so far recognized and accumulated trading patterns, the basic attitude of market participants and the spirit of the requirements of the center, the world **** common part of many.

The rules of conduct of different foreign exchange markets are not the same, reflecting the differences that exist in the legal system, social customs, market practices and the overall development of the market in each region, but all have a **** the same goal: to improve the standard of conduct and professionalism to maintain and promote the establishment of effective market practices, to reach a minimum standard. The basic objectives of rules of conduct are: first, rules of conduct should set out the roles and responsibilities assumed by dealers, brokers and customers separately, reducing potential conflicts arising from lack of clarity about their respective roles and thus speeding up the operation of the market; second, rules of conduct should be able to induce transactions to be conducted on the basis of a high level of ethics, professionalism and honesty; and, third, a strong rule of conduct can be used as a substitute for certain governmental regulatory requirements that might otherwise become too burdensome, which is not conducive to the healthy and efficient development of the market; and fourth, that the rules of conduct be conducive to healthy competition, while not allowing existing banks to use the rules of conduct to discourage new banking institutions from entering the market and participating in the market.

With regard to the drafting of the rules of conduct, it is the market participants who play a leading role, and the central bank or some other official agency can be actively involved or play an encouraging role. The most basic issue that needs to be addressed in the behavioral rules is the legal status or mandatory nature of the behavioral rules. In most cases, rules of conduct are drafted by a trading association and adopted by its members, and compliance with them is voluntary, with the rules suggesting a set of "best practices" to its members. Failure to comply with the rules has no legal implications, but if a bank or investment firm does not comply with the rules, other participants may not deal with it. In some cases, market participants must comply with these rules in order to maintain their membership in a trading organization. These rules are usually intended to create a self-regulatory environment, and to make them more mandatory, their legal status and the possible consequences of violating them should be clearly set out, or it should be left to the regulator to check that the financial institution implements the provisions contained in the rules and to make such checking a normal part of the supervisory process, and that failure to comply with the rules will affect the regulator's assessment of the quality of the management of the institution and of the institution's overall situation. assessment of the institution's management quality and of the institution's overall situation. Some rules also include a dispute resolution framework. In general, the rules of conduct in the major foreign exchange markets, with the exception of London, are set by the organizations and brokerage houses that represent professional trading in the market, in the case of the Tokyo and New York foreign exchange markets, for example, by the Market Operations Committee (MOC). The Bank of England is directly involved in the formulation of the rules of conduct, which are published in its name, and is also responsible for investigating any possible breaches of the law that come to its attention.

An assessment of the benefits of behavioral rules can be made from both a strengths and weaknesses perspective. The advantages of rules of conduct are: industry organizations have a deeper understanding of the industry itself, the rules and regulations are more realistic for the specific circumstances of industry members, and they are more flexible than laws and regulations. Foreign exchange transactions in the global business, beyond the regulatory boundaries of a country's central bank or monetary authority, the global foreign exchange market requires is not a stereotypical rules, but the development of the market is conducive to the flexibility of the same standards ****. The globalization of the foreign exchange market means that supervisory evolution must keep pace with globalization, i.e., it must be a dynamic process rather than a stagnant state of laws and rules. Rules of conduct and the ***same standards they contain allow regulators to react more quickly to the pressing issues they face and increase the level of resilience; while maintaining the ability of financial institutions to respond effectively to new opportunities. Excessive legal requirements may inadvertently hinder market development and the evolution of supervisory standards and practices. Conduct rules also help regulators to establish optimal control mechanisms and seek a balance between customer protection and institutional protection to avoid impediments to business activities. Indeed, conduct rules establish and enable the implementation of internationally consistent objectives for the control of business operations. Once it is widely adopted by regulators and significant traders, it will increase their awareness and have an impact on other market participants, including merchants. The disadvantages of behavioral rules are that they do not have legal status, are not authoritative and are not sufficiently mandatory. Although in many cases, the flexibility and adaptability of the rules of conduct are more suitable for the characteristics and needs of global foreign exchange transactions, but in some specific cases or for the relatively backward foreign exchange market, relying solely on the rules of conduct is far from being enough, because the market players may lack self-restraint, the market mechanism is still not well developed, the social credit and the legal environment is not good, etc., which makes it difficult for the function of self-regulation to be effectively played, and at this time , the necessary mandatory regulatory measures should be taken by the foreign exchange market regulator. Regulatory authorities in addition to participating in or responsible for the development of behavioral rules, implementation, assessment, compliance supervision, the foreign exchange market should also implement the necessary external regulation, which includes the retail market regulation, as well as the wholesale market (interbank market) regulation. For the international foreign exchange market, it is mainly the regulation of the wholesale market, and there are few controls; while for countries or regions implementing foreign exchange control, their wholesale market is not developed enough, and the retail market has a lot of regulations. With the help of foreign exchange scarf field regulation, the requirements of foreign exchange control can be implemented into specific foreign exchange transactions. For example, foreign exchange designated banks must conduct authenticity audits on the purchase and payment of foreign exchange by enterprises, and the exchange of capital items needs to be approved by the regulatory authorities. In addition to foreign exchange control measures, the regulator's foreign exchange market supervision is mainly through the following ways:

First, the establishment of restrictions or guidelines on banks' foreign exchange risk exposure, and prudent supervision of net open foreign exchange positions. The regulator should distinguish between the entire uncredited foreign exchange position of a financial institution and the open position in individual foreign currencies, so that a dual restriction can be implemented, i.e., both the entire foreign exchange exposure of a financial institution is regulated, and the foreign exchange exposure in individual foreign currencies is disciplined. With respect to net open foreign exchange positions, the vast majority of countries allow financial institutions to maintain net open foreign exchange positions overnight up to a specified amount; some countries require banks to hold additional capital for the exchange rate risk assumed; and some countries set limits on per-port changes in net open foreign exchange positions. A net open position allows traders to provide liquidity to the market by absorbing order flow and to speculate on the local currency by establishing a position in anticipation of a currency depreciation, but with an exposure to risk. The long position limit protects banks from or reduces the shock of a sudden depreciation of a foreign currency; by contrast, the short position limit protects banks from a sudden appreciation of a foreign currency and reduces the ability of banks to hold speculative short open positions in the event of a sharp depreciation of the local currency. Net position limits reflect a willingness to balance liquidity, a concern for prudential regulation, and a fear of speculation. The regulatory requirement for net open positions is often defined as a percentage of a bank's capital, which is set as a percentage of total capital in most countries and based on Tier 1 capital in some countries; long and short position limits are set symmetrically in most countries, while some countries set separate limits for long and short positions; and in some countries, the limit is set at a nominal value. The frequency of inspections of financial institutions' compliance with the limits varies considerably from country to country, with most inspections conducted on a monthly basis and some on a random basis.

Second, monitoring and resolving foreign exchange settlement risks. First, it is hoped that the bank correctly balance Halo risk. The period of foreign exchange settlement risk exposure is shown in the figure, which can be subdivided into the following parts:

(1) revocable stage. The instruction to sell the currency is not issued or the counterparty agrees to unilaterally cancel the payment instruction, this transaction has no settlement risk exposure.

(2) Irrevocable phase. The payment instruction can no longer be unilaterally canceled, the currency purchased has not expired, and at this point the buyer's quantity is clearly at risk exposure.

(3) Uncertainty stage. Payment orders for the currency sold can no longer be canceled unilaterally; and the currency bought has expired, but the institution still does not know whether the funds have been collected. Under normal circumstances, the institution would expect to have received the funds on time, but it is still possible that the maturing purchased currency has not been received, and the purchased currency is, in fact, still at risk.

(4) Failure to settle or settlement stage. Institutions to confirm that they did not receive the currency bought from the counterparty, the currency bought at this time has matured, it is clearly in the settlement risk; institutions that have confirmed the receipt of the currency bought, from the perspective of the settlement risk, the transaction is considered to have been closed, the currency bought is no longer in the risk. In short, the bank's foreign exchange settlement risk exposure period begins at the moment the order to sell the currency can no longer be recovered or canceled, and continues until the final collection of the purchased currency. Minimized settlement risk exposure means, irrevocable state settlement risk exposure, plus any known uncollectible transactions; maximized clearing risk exposure means irrevocable state settlement risk exposure, plus uncertain state exposure to open transactions, plus known uncollectible transactions. Second, banks are required to establish counterparty credit limits and settlement limits, treat foreign exchange settlement risk exposures as other types of credit risk exposures of the same size and maturity, and incorporate them into their overall risk measurement and management processes.

Third, regulators are required to monitor banks' foreign exchange positions. Supervisors are to utilize statistical reports from banks on their foreign exchange operations, as well as information on developments and events in the foreign exchange market, among other things. At the same time, banks are to be monitored for other unusual settlement activities.

Fourth, monitor the bank's internal control process. The supervisory authority should communicate with the bank's internal control department and conduct on-site inspections to confirm whether the bank has internal control systems, whether these systems are operating effectively, and whether the internal reports are true, so as to reasonably assess the bank's risk management process.

It is also important for supervisors to communicate information to the market in a timely manner and to share that information within the market, which helps to rationally guide the expectations of market participants and stops the spread of settlement disruptions.