Alternative data is becoming increasingly essential for central banks in their examination of markets movements, according to Andreas Schrimpf, chief economist at the Bank of International Settlement (BIS).
“A lot of the central banks typically face the issue of monitoring market functioning for example and in quasi real-time as well because sometimes there might be issues where one may need to step in and so on. There has really been a tendency to also use alternative data in that sphere, and combine that with the qualitative information,” said Schrimpf on a panel at the Sibos conference in London this week.
“One could arguably say that this alternative data has become more and more important to give colour that no longer exists to the extent that it was happening before, and that is very useful and important for central banks as they conduct their policies,” he said.
On September 16, a triennial central bank survey on foreign exchange published by BIS revealed growth of FX derivatives trading, especially in FX swaps, outpaced that of spot trading. Trading in FX markets reached $6.6trn per day in April 2019 – an increase from $5.1trn three years earlier.
Schrimpf said that while OTC derivatives markets had seen greater transparency through standardisation, trade reporting, and central clearing, a different method may be required for FX markets.
“I think this transparency would somehow need to develop in a different way, and my perspective here is that it is in a way a public good that is being provided here. And one issue is that if you leave it in an uncoordinated way, that public good might not be delivered. So, what might be necessary is perhaps some more coordinated push or some form of international coordination in order to deliver something like that,” said Schrimpf.
“However, I would also say that to really force that on the market is never a good idea, so it is important that particularly the private sector would see the benefit from that and therefore be willing to contribute,” he said. “That is our experience from the triennial survey, it is a voluntary data gathering exercise but market participants highly value that service that is being provided and I guess that is also the continued future in FX.”
Schrimpf said he believed there is appetite in the market to increase the frequency of the triennial survey.
“What we are hearing quite often is that high frequency exercises like the triannual survey would be a really good thing for benchmarking yourself or really knowing the flows, how the structure of the market has changed,” he said. “My feeling is that there would definitely a willingness to contribute to something like this, but it is unlikely that this will be a decentralised market-like solution. So, one would probably need to have some sort of involvement by the public sector in some way to coordinate on that.”