Innovation in management of foreign currency reserves in the globalisation era

Although central banks and fund managers appear to be quite similar in regards to their management of foreign currency portfolios there are some important differences. Whereas fund managers are expected to make investment decisions in such a way as to maximise the value of the assets under their management subject to their client's investment mandate, central banks must manage their reserves portfolios subject to a range of policy-related constraints. Most obviously, central banks hold foreign currency reserves to fund foreign exchange market operations that arise as part of their broader monetary policy functions. Under a fixed exchange rate regime, foreign currency reserves are used to maintain a particular exchange rate. However, even under a floating exchange rate regime, foreign currency reserves are often used to provide liquidity in the event of extreme market movements to maintain investor confidence in markets.