The International Monetary Fund’s (IMF) October 2025 Global Financial Stability Report (GFSR), released today at 12:58 PM CEST on Tuesday, October 14, 2025, provides a comprehensive assessment of the global financial system, with Chapter 2, “Risk and Resilience in the Global Foreign Exchange Market,” offering a detailed examination of the FX market’s evolution, vulnerabilities, and implications for macrofinancial stability. As the world’s largest financial market with an average daily turnover surpassing $9.6 trillion, the FX market is pivotal for facilitating cross-border trade and financial transactions, influencing exchange rates, and supporting global economic activity. However, structural shifts—such as the surge in nonbank financial institutions (NBFIs) participation and the dominance of derivatives—have introduced new risks, particularly amid elevated macrofinancial uncertainty and geopolitical tensions.
Released alongside the report’s press briefing at 10:15 AM ET from IMF headquarters, the analysis comes at a time of heightened global policy uncertainty, including US tariff announcements in early April 2025, which prompted varied investor responses such as reduced US dollar holdings in some countries. For the full report, including detailed data and annexes, visit the IMF’s official page: Global Financial Stability Report, October 2025.
Key Developments in the Global FX Market: Growth Driven by Swaps and NBFIs
The FX market has undergone substantial transformation since the late 1990s. Daily turnover has ballooned from modest levels to over $9.6 trillion by 2025, primarily fueled by a shift toward derivatives. Spot transactions, once dominant, now account for a smaller share, while FX swaps—used for funding and hedging currency risk—have surged, comprising the majority of activity. Outright forwards, currency swaps, and options have also grown, reflecting increased demand for risk management tools amid global financial integration.
Cross-border transactions dominate, making up about two-thirds of turnover, with the US dollar as the preeminent vehicle currency (involved in trades for currencies like the euro, Japanese yen, British pound, and Chinese yuan). Emerging market currencies, such as the Chinese yuan, have gained ground, but the market remains heavily concentrated among a few major players.
A notable structural shift is the rising role of NBFIs, including mutual funds, hedge funds, and other financial institutions, whose share of turnover has increased at the expense of reporting dealers (traditional banks) and nonfinancial customers. This diversification fosters competition, lowers transaction costs, and improves price discovery and risk sharing. However, NBFIs often operate with less regulatory oversight than banks and lack direct access to central bank liquidity facilities. Their strategies—frequently involving leverage, short-term arbitrage, and high-frequency trading—can withdraw liquidity during stress, amplifying volatility and shifting risks onto dealers.
The report also notes the impact of electronification: the proliferation of trading platforms has enhanced speed and access but fragmented the ecosystem, potentially leading to informational asymmetries and situations where apparent liquidity depth vanishes under pressure.
Structural Vulnerabilities and the Impact of Macrofinancial Uncertainty
The GFSR identifies several vulnerabilities that heighten the FX market’s susceptibility to shocks. High dealer concentration—where a small group of large banks intermediates nearly half of turnover—exposes the system to disruptions if these institutions face regulatory constraints or balance sheet pressures during stress. Persistent currency mismatches, where liabilities exceed assets in foreign currencies, drive demand for short-term FX derivatives, increasing rollover and funding risks when conditions tighten.
Elevated macrofinancial uncertainty exacerbates these issues. During such periods, flight-to-quality dynamics and hedging demands widen cross-currency bases (deviations from covered interest parity, signaling FX funding stress), increase bid-ask spreads (indicating impaired liquidity), and amplify excess exchange rate return volatility (movements beyond macroeconomic fundamentals, driven by sentiment and risk aversion). Historical analyses in the report show these strains intensifying with uncertainty.
Effects are more pronounced in emerging markets, where currencies face greater liquidity challenges, and in markets with high NBFI participation, concentrated dealers, and elevated hedging. For instance, NBFIs’ liquidity mismatches—funding longer-term assets with short-term liabilities—can lead to rapid position unwinding, propagating stress. The opacity of over-the-counter derivatives markets further complicates risk monitoring, allowing vulnerabilities to build undetected.
Geopolitical risks, such as armed conflicts or sanctions, add layers of complexity by disrupting trade and financial flows. The report cites recent examples, including the US tariff announcements in early April 2025, which led investors in some countries to reduce US dollar holdings while others maintained exposures, illustrating divergent cross-country responses.
Operational Risks: Settlement Failures and Cyber Threats
The expansion of FX trading has heightened exposure to operational risks, particularly settlement risk—the chance that one party delivers currency without receiving the countervalue. This is acute in cross-border trades due to time zone differences and delays. While payment-versus-payment (PvP) mechanisms like the CLS system mitigate this for 18 major currencies, most emerging market currencies remain excluded, leaving a growing portion of turnover vulnerable.
Outages in critical payment systems or cyberattacks can severely impair liquidity, spike volatility, and raise transaction costs. The report emphasizes that such failures amplify excess exchange rate returns and volatility, posing systemic threats.
Spillovers to Broader Macrofinancial Stability
FX market stress has far-reaching implications, spilling over to other asset classes and tightening financial conditions. Economies with significant currency mismatches or fiscal vulnerabilities are at higher risk, as rising hedging costs prompt deleveraging, creating vicious cycles of volatility. The GFSR warns of potential amplification through interconnectedness, where FX strains affect funding markets, equity, and bond prices—especially in countries reliant on foreign currency borrowing.
In today’s environment of policy uncertainty, supply chain realignments, and geopolitical shifts, these dynamics could reshape currency demand and FX behavior. The report links this to broader analyses in the External Sector Report 2025, underscoring the need for coordinated policy responses.
Policy Recommendations: Building Resilience in a Shifting Landscape
To address these challenges, the IMF provides targeted recommendations:
- Enhance Market Surveillance: Conduct systemic risk monitoring, stress testing, and scenario analysis to detect liquidity shocks and spillovers early.
- Close Data Gaps: Improve reporting and transparency, especially for NBFIs, bilateral exposures, and over-the-counter trades.
- Ensure Buffers and Safeguards: Maintain robust liquidity and capital buffers, with access to central bank facilities, sufficient international reserves, and expanded swap lines for oversight.
- Strengthen Operational Resilience: Implement cyber risk frameworks, contingency planning, and coordinated oversight for financial infrastructures.
- Reduce Settlement Risks: Encourage PvP adoption in over-the-counter markets and explore digital innovations for interoperable platforms to minimize inefficiencies.
These steps aim to uphold the FX market’s essential functions, preventing a return to stagnation and ensuring resilience amid uncertainty.
Broader Context from the GFSR
The October 2025 GFSR also includes Chapter 1, “Shifting Ground beneath the Calm: Stability Challenges amid Changes in Financial Markets,” presented today at the IMF press briefing by Tobias Adrian, Athanasios Vamvakidis, Jason Wu, and moderated by Meera Louis. Chapter 3, “Global Shocks, Local Markets: The Changing Landscape of Emerging Market Sovereign Debt,” explores how local issuance bolsters resilience but risks overreliance on domestic investors. Together, these chapters paint a picture of a global financial system where calm surfaces mask underlying shifts, necessitating proactive policy action.
Conclusion: Safeguarding Exchange Rate Stability
In conclusion, the GFSR’s analysis of the FX market reveals a double-edged sword: growth fosters efficiency, but vulnerabilities threaten stability. The report stresses that exchange rate volatility and liquidity strains could undermine global trade and finance if not addressed. By implementing robust surveillance, enhancing buffers, and fostering operational resilience, policymakers can navigate this shifting terrain, ensuring sustainable growth and stability in the face of evolving risks.
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