In the R A 0 Bridge Memorial Lecture the Governor reviews the changes that have taken place in recent years in the nature of the foreign exchange markets and discusses some of the implications they have for the central bank, both as a supervisor and as an operator in the markets.
The past six years have seen a massive expansion of foreign exchange business, reflecting increases in the number and range of participants and the development of new instruments, aided by technological change. But new instruments present new problems of risk and control, and the involvement of institutions from outside the traditional banking sphere also complicates supervision of the market. The Governor emphasises that the main responsibility for control and supervision of foreign exchange operations must rest with the management of the institutions concerned. He goes on to describe the Bank's supervisory approach to the new instruments, and particularly to options.
The Governor reviews the recent development of the foreign exchange broking system, including the abolition of fixed scales of commission, and comments on the Bank's policy towards ownership links between banks and brokers. Finally he looks at the role of the central bank as an operator in the markets and at the lessons of recent experience of co-ordinated intervention, sounding a note of caution on suggestions for the establishment of target zones, lest too ambitious a scheme undermine the progress made towards a better relationship between the major currencies.