FX Spot and Swap Market Liquidity Spillovers

58 Pages Posted: 12 Feb 2020

See all articles by Ingomar Krohn

Ingomar Krohn

Bank of Canada

Vladyslav Sushko

Bank for International Settlements (BIS)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2021


We study the joint evolution of foreign exchange (FX) spot and swap market liquidity. Trading in FX swaps exceeds that of spot, yet this market segment has been largely ignored in prior research on liquidity in FX markets. We find strong co-movement in spot and swap market liquidity conditions and a robust link between FX funding and market liquidity, as gleaned from the pricing of both instruments. This link has strengthened over time with changes in dealer quoting behaviour and market participation. Some of the largest dealers periodically pull back from pricing FX swaps and wider spreads attract smaller dealers. At the same time, liquidity in FX swaps remains impaired, which leads to illiquidity spillovers to the spot market. Our findings suggest that funding liquidity has become a more important driver of spot market liquidity than it used to be.

Keywords: foreign exchange, market and funding liquidity, microstructure, dealer activity, window dressing

JEL Classification: F31, G15

Suggested Citation

Krohn, Ingomar and Sushko, Vladyslav, FX Spot and Swap Market Liquidity Spillovers (June 2021). BIS Working Paper No. 836, Available at SSRN: https://ssrn.com/abstract=3535891

Ingomar Krohn (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9

Vladyslav Sushko

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002

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