FX Hedge Ratios Doubled from GFC, FX Swaps “Greatest Potential” for Evolution – Panel

The amount and proportion of FX hedging activity has doubled since the 2008 global financial crisis with pension funds and insurers having as high as 35-45% of exposures hedged against currency risks.

The findings come from a panel held by the Federal Reserve Bank of New York on the evolving market structure FX industry. The conference focused on issues such as hedging, after a tumultuous period in 2025 saw FX volatility surge and the dollar slump due to a changing stance to global trade from the US.

Panellists discussed the multiple factors influencing hedging behaviours, including jurisdiction, whether they’re liability driven and their domestic currency’s sensitivity to global risk appetite. The increase in hedging activity comes as non-US investors search for alternatives to the dollar, reversing a steep increase in dollar-denominated exposures which have risen sixfold in the past couple of decades.

The impact of this uptick in hedging activity has translated into higher FX volumes. The panel estimated that a five-percentage point increase in hedging activity translates to nearly $1.5 trillion in currency deals, highlighting the material impact of these flows on the overall market.

Liquidity provision was also a topic of discussion, with an emphasis on the growing diversity in types of LPs, specifically non-bank providers. “As the FX market landscape becomes less dominated by banks, NBFIs are increasingly offering alternative sources of liquidity to clients,” a NY Fed write up of the session notes. It adds, however, that speakers noted that “NBFIs’ perceived speed and pricing advantages over banks in liquidity provision are typically offset by a relatively smaller breadth of products, narrower client base, and less capacity for credit extension”.

This benefits customers who make up a diverse set of firms, they added.

Participants on the day also flagged that the market with the greatest potential to evolve further was FX swaps, where electronic execution has been slow to take root, with only about a quarter of the total market traded this way, compared with three-quarters of spot.

“Dealers have also increasingly internalised their activity in swaps, matching offsetting client orders internally without accessing external liquidity,” the NY Fed report observes.

Panellists also noted swaps and forwards are less transparent than spot as they operate as a largely bilateral market that lacks a universal pre-trade benchmark for pricing forward rates, adding that a primary electronic market for FX swaps would enhance transparency in this market.