Foreign exchange reserves

What are foreign exchange reserves?

Foreign exchange reserves are assets held by central banks or states in the form of foreign currencies or gold. They ensure that the country has sufficient liquidity to carry out foreign exchange transactions or cope with a balance of payments deficit. Their economic importance varies according to the country’s situation.

A central bank can use its foreign exchange reserves (foreign currencies) to intervene in FX markets and influence its currency’s echange rate. For example, if the European Central Bank sells some of its dollar reserves for euro, the euro will appreciate against the dollar.

The Banque de France’s management of foreign exchange reserves

The Banque de France has considerably expanded its market activities and expertise in the past 15 years. Its trading room handles the largest volume of transactions and broadest range of instruments in the euro area.

The Banque de France’s trading room carries out:

• proprietary transactions for the Banque de France such as management of foreign exchange reserves
• transactions on behalf of foreign central banks
• monetary policy operations

The Banque de France’s foreign currency assets are principally held in US dollars. However, it also invests in other currencies to diversify its risk. The reserves are held in the form of overnight deposits, term deposits or fixed rate and index-linked bonds.

To ensure a continuous presence in global financial markets, the Banque de France’s trading operations are spread across three locations: the main trading room in Paris and two international trading rooms in New York and Singapore.

The Banque de France’s provision of market expertise

Participation in international working groups

Thanks to its global presence, the Banque de France has developed extensive market expertise that allows it to take part in international working groups and conferences: for example, on FX markets, Asian currencies, gold and collateral markets.

Euro GC+, a secure platform for monetary operations

To secure euro cash funding, enhance interbank liquidity and reduce counterparty risk in the overnight market, the Banque de France has launched EURO GC+ in conjunction with major French banks and two private infrastructure operators (Euroclear and LCH.Clearnet).

Euro GC+ is based on the “repo” principle, where banks accept securities as collateral in exchange for liquidity. It also incorporates two new features:

• use of a central clearing counterparty governed by very strict prudential rules (LCH.Clearnet)
• two euro securities collateral baskets that are standardised and graded by risk to offer participants different risk-return combinations

Euro GC+ adds to Frankfurt’s offering (GC Pooling operated by Clearstream) which uses the central clearing counterparty EUREX4.

FX Global Code, an international code of conduct for FX markets

Global Code is a voluntary code of conduct applicable to all participants in the main global foreign exchange markets. It was developed to promote a robust, fair and transparent market, and covers areas such as ethics, governance, order execution – confirmation and settlement – information sharing and risk management.

Published in May 2017, the code is the culmination of nearly two years of collaboration by central banks and market participants, in which the Banque de France was closely involved. Paris is the leading continental European market place in terms of FX transaction volumes.

Central banks have confirmed their intention to adhere to the code in FX markets – except where it contravenes their fundamental mission. They also expect their regular counterparties in FX markets to adhere to the code.