IMF urges stronger FX liquidity stress tests to protect financial stability

[International Monetary Fund]
Neal McNeil/iStock Editorial via Getty Images

The International Monetary Fund has recommended that regulators enhance foreign-exchange liquidity stress tests to help prevent broader market disruptions and safeguard financial stability.

The $9.6T currency market has experienced a number of structural shifts over the years, including the growing involvement of nonbank financial institutions and increased derivatives trading. Such developments "offer benefits but may also raise the global FX market’s vulnerability to adverse shocks," the IMF said in its semi-annual Global Financial Stability Report.

"Increased macrofinancial uncertainty can strain FX market conditions by significantly raising funding costs, impairing liquidity, and amplifying excess exchange rate return volatility," the report said. "FX market stress can spill over to other asset classes, tightening financial conditions and posing risksto macrofinancial stability—especially in countries with significant currency mismatches and fiscalvulnerabilities."

To address these risks and capture liquidity shocks and spillovers, regulators should bolster FX market monitoring via systemic risk surveillance, stress testing and scenario analysis, the IMF recommended.

"Although stress testing and systemic risk monitoring have advanced, the role of FX markets as a conduit for risk transmission and cross-border spillovers remains underappreciated," it added [https://www.imf.org/en/Publications/GFSR/Issues/2025/10/14/global-financial-stability-report-october-2025]. Enhancing FX liquidity stress tests is essential to assess the sectoral resilience to funding shocks and sudden tightening in spot and swap market conditions."

Another policy recommendation was the need to close key FX data gaps reporting and transparency, especially in regards to nonbanks and bilateral exposures outside centralized infrastructures.

The IMF also encouraged payment-versus-payment adoption to reduce settelement risks and market inefficiencies in over-the-counter FX markets.

Seeking Alpha's market data page [https://seekingalpha.com/etfs-and-funds/etf-tables/currencies] shows all USD currency pairs.

Meanwhile, FX volatility continued to be elevated, with the Japanese yen weakening [https://seekingalpha.com/news/4502186-asia-stocks-rise-on-ai-optimism-nikkei-hits-fresh-records-on-leadership-change] to its lowest level since early this year after fiscal dove and pro-stimulus lawmaker Sanae Takaichi won the ruling Liberal Democratic Party leadership race over the weekend. And the U.S. Dollar Index (DXY [https://seekingalpha.com/symbol/DXY]) was off 9% so far this year, as markets expect more interest-rate cuts by the Federal Reserve.

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