Central Bank Survey of Foreign Exchange and Derivatives Market Activity in 2001
18 March 2002
The 2001 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity - final results of which the BIS is publishing today - shows a substantial decline in turnover in the foreign exchange market and a slowdown in the growth of activity in the derivatives market. In traditional foreign exchange markets, average daily turnover in April 2001 was $1.2 trillion, a 19% decline compared to April 1998. This decline contrasts with the findings of previous surveys, which had reported a rapid rise in foreign exchange market activity. In the derivatives market, average daily turnover was $1.4 trillion, a 10% increase over the survey three years before. This represented a significant slowdown in market expansion relative to the earlier three-year period, when daily activity had expanded four times faster. Additional data on the notional amounts of derivatives contracts outstanding at end-June 2001 also show a slowdown in market expansion relative to 1998.
The 2001 survey
In April and June 2001, 48 central banks and monetary authorities participated in the most recent BIS survey. They collected data for April 2001 on turnover in traditional foreign exchange markets - those for spot transactions, outright forwards and foreign exchange swaps - and in over-the-counter (OTC) currency and interest rate derivatives. Preliminary results on turnover were published in October 2001. The survey also covered data on amounts outstanding of OTC foreign exchange, interest rate, equity, commodity and credit derivatives. These were collected at end-June 2001 and preliminary results were published in December 2001. This was the fifth global survey since April 1989 of foreign exchange market activity and the third survey since March/April 1995 covering in addition OTC derivatives market activity.
The triennial survey also serves as a benchmark for the BIS semiannual derivatives market statistics (published on the BIS website), which track the development of open positions (notional amounts outstanding and market values) in the global OTC derivatives markets over time.
Foreign exchange market turnover
The April 2001 data on turnover in traditional foreign exchange markets show that several important changes have occurred in these markets since the last survey was conducted in April 1998.
Turnover in traditional foreign exchange markets declined substantially between 1998 and 2001. In April 2001, average daily turnover was $1,200 billion, compared to $1,490 billion in April 1998, a 19% decline at current exchange rates and a 14% fall when volumes are measured at constant exchange rates. The decline in turnover over the last three years contrasts with the findings of previous surveys, which had reported a rapid rise in foreign exchange market activity.
Turnover did not decline uniformly across instruments. Trading volumes fell sharply in spot markets and, to a lesser extent, foreign exchange swaps. By contrast, trading in outright forwards increased slightly.
The April 2001 figures also reveal some changes in the relative importance of trading between different counterparties. Trading between reporting dealers fell substantially, and its share in total turnover dropped from 64% in 1998 to 59% in April 2001. This can in part be explained by the growing role of electronic brokers in the spot interbank market, since the use of electronic brokers tends to reduce the need for foreign exchange dealers to trade actively among themselves. Another factor seems to be the decrease in risk tolerance that followed the financial market turbulence in the autumn of 1998.
Trading between banks and non-financial customers also declined markedly, possibly as a result of an acceleration of the consolidation in the non-financial corporate sector, and its share fell from 17% to 13%. By contrast, transactions between banks and financial customers increased and their share in total turnover rose from 20% to 28%. The higher activity between these counterparties seems to reflect the increasing role of asset managers. Market commentary suggests that the role of hedge funds in foreign exchange markets has on balance declined somewhat since the previous survey.
The introduction of the euro appears to have reduced turnover mainly through the elimination of intra-EMS trading. The euro entered on one side of 38% of all foreign exchange transactions - higher than the Deutsche mark's share in 1998 but lower than that of all euro constituents taken together in 1998. The relative importance of other currencies seems not to have changed substantially since 1998. The shares of the dollar and the yen edged up to 90% and 23%, respectively. Dollar/euro was by far the most traded currency pair in 2001 and captured 30% of global turnover, followed by dollar/yen with 20% and dollar/sterling with 11%. Trading in local currencies in emerging markets captured about 4.5% of foreign exchange activity in 2001, compared with 3.1% in 1998.
Finally, the data for 2001 reveal an overall decline in the number of reporting banks. This is consistent with the broad trend towards consolidation in the banking industry and the consequent reduction in the number of trading desks. This trend seems to have been an additional factor contributing to the decline in foreign exchange market turnover, especially in the interbank market.
For its part, the geographical distribution of foreign exchange trading appears not to have changed substantially over the last three years. Turnover fell in most countries, with some notable exceptions. In Japan, turnover increased mainly because of a surge in cross-border foreign exchange swaps. In Sweden and Canada, a relaxation of restrictions on institutional investors boosted foreign exchange market activity. In Australia, activity rose as a number of global players have centred their Asian time zone foreign exchange business in Australia.
OTC derivatives market activity
Global daily turnover in foreign exchange and interest rate derivatives contracts, including what are considered to be "traditional" foreign exchange derivatives instruments, increased by an estimated 10% to $1.4 trillion between April 1998 and April 2001. This represented a significant slowdown in market expansion relative to the period 1995-98, when daily business had expanded by 44%.
This slowdown masked a divergence in the evolution of the two largest market segments, with business in foreign exchange products declining by 12% and that in interest rate instruments rising by 86%. The downturn in foreign exchange products was consistent with lower turnover in the spot market for foreign exchange, a market segment that has experienced substantial structural change in recent years. In that context, a particularly significant factor has been the introduction of the euro, which led to a sharp contraction of trading in contracts involving euro zone currencies. By contrast, the strong expansion of activity in interest rate products was largely driven by the buoyancy of the interest rate swap market. This buoyancy reflected a broad shift in hedging and trading practices in US fixed income markets and the creation of a large and liquid market in euro-denominated interest rate swaps.
Despite the contraction observed in foreign exchange products, turnover in that market segment continues to be substantially higher than that for interest rate products, owing largely to the shorter maturity of the first group of contracts. However, if interest rate business continues to expand as rapidly as it has done over the past few years, it could eventually catch up with that in foreign exchange products.
The data on turnover also showed a major difference in the evolution of counterparty business between the two main groups of products. In the area of foreign exchange derivatives, business within the group of reporting dealers declined by 18%. This decline may have been related to the broad factors affecting the spot market. In the area of interest rate products, by contrast, business within the group of reporting dealers grew by 115%.
The turnover figures also revealed that London and New York remained the most important centres for OTC derivatives trading but that Frankfurt made significant gains, displacing Tokyo as third most important trading centre.
Notional amounts and gross market values
While the turnover data provide a snapshot of activity in the month of April 2001, a somewhat different perspective is provided by notional amounts outstanding, which give an idea of the "cumulative" amount of business. At the end of June 2001, global OTC positions in all categories of market risk (including equity, commodity and credit derivatives markets) stood at nearly $100 trillion, a 38% increase relative to the 1998 survey. This nonetheless represented a slowdown in the rate of expansion relative to 1998.
Moreover, as was the case for the turnover data, there was a divergent pattern of activity between the two market segments, with the stock of foreign exchange products declining by 7% and that of interest rate contracts growing by 58%. In contrast to the turnover data, the most recent positions data confirm the predominance of interest rate over currency products.
Positions data also show a rapid expansion of the market for credit derivatives. That market segment has benefited from a widening in the range of instruments and from improvements in market infrastructure. However, the size of the credit derivatives market remains fairly small, being barely larger than that for commodity contracts.
Data on the maturity structure of foreign exchange and interest rate contracts show an overall lengthening in the maturity of outstanding positions. The stock of short-term foreign exchange contracts declined significantly, while that of longer-term foreign exchange and interest rate instruments expanded notably.
Gross market values, which measure the transfer of wealth in OTC markets at current market prices, rose from $2.6 trillion at the end of June 1998 to $3 trillion at the end of June 2001. When set in relation to notional amounts outstanding, the ratio declined from 3.6% to 3.1%.
It should be stressed that gross market values overstate the derivatives-related credit exposures of reporting institutions, which are significantly reduced by netting and collateral arrangements. Such credit exposures stood at $1 trillion in June 2001.
Structure of the report
The survey report is in five parts. Part A is a summary which provides an overview of the main findings. Part B discusses in detail the results for the foreign exchange market. In this part consideration is given only to turnover in traditional foreign exchange market instruments, ie spot, outright forwards and foreign exchange swaps, consistent with earlier BIS surveys of foreign exchange market activity. The results for turnover, notional amounts outstanding and market values of derivative instruments are covered in Part C. Part D contains a full description of the methodology, explaining definitions, classification principles and compilation procedures. Part E is a statistical annex containing tables with the detailed survey results.