FX market bounces back on swaps, forwards growth

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By:
Paul Golden
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While spot volumes remain below 2013 levels, the latest BIS triennial central bank survey notes that FX markets have recovered from the decline recorded in 2016 on the back of strong growth in swap and forward transactions.

The 2019 Bank for International Settlements (BIS) triennial central bank survey certainly makes for better reading for the FX industry than its 2016 edition. Spot trade volumes are up 20% over the last three years, FX swap activity increased by more than a third and trading in outright forwards was up 43%.

These figures are in line with the findings of Euromoney’s 41st annual foreign exchange survey published in June, which reported that overall FX volumes were at their highest level since 2015.

The optimism expressed in the latest BIS report is in contrast to remarks made as recently as 2017, when the bank noted that global FX trading had declined between two consecutive surveys for the first time since 2001.

Dan Marcus 160x186

Dan Marcus, ParFX

Although spot’s share of total market turnover has fallen from 38% in 2013 to 30%, it is still a $2 trillion daily market. Driven by increased demand for hedging of currency risk, daily swap volumes have reached $3.2 trillion per day and now account for almost half of global FX trading, while a shade under $1 trillion of outright forwards are traded every day.

Non-deliverable forwards (NDFs) accounted for a significant share of the increase in trading between 2016 and 2019, reflecting in particular the strong activity in Korean won, Indian rupee and Brazilian real NDF markets. Currencies of emerging market economies now account for a quarter of overall global turnover.

“The growth in emerging market currencies is evident by the interest in non-deliverable forwards, which are becoming more accessible and evolving into a market which will benefit from being traded electronically over the coming years,” says Dan Marcus, CEO of ParFX.

Swaps up

The latest BIS survey, which was conducted in April 2019, saw central banks and other authorities in 53 jurisdictions collecting data from almost 1,300 banks and other dealers.

Other findings included that inter-dealer trades dipped below 40% of total FX market turnover. Inter-dealer spot turnover declined slightly in absolute terms relative to 2016, whereas turnover in swaps, outright forwards and currency swaps expanded significantly.

Trading volumes at non-reporting banks rose from just over $1.1 trillion in 2016 to more than $1.6 trillion. When trading by “other financial institutions” (which also covers hedge funds, prop trading firms, institutional investors and official sector financial institutions) is taken into account, this segment of the market now represents 55% of global trading volume.

Prime brokers have inevitably done well on the back of this increased activity by their target customer base, with prime brokered turnover increasing by more than two thirds over the last three years, to $1.5 trillion.

In February, the Bank of England’s Foreign Exchange Joint Standing Committee FX turnover survey reported that overall daily trading turnover in the UK was down by $116 billion from the record high of $2,727 billion reported in April 2018. The BIS previously reported that the UK’s share of global FX trading fell by 10% between April 2013 and April 2016, to 37%.

However, the most recent BIS analysis of turnover of over-the-counter (OTC) foreign exchange instruments by country shows that UK turnover rose from $2,406 billion in April 2016 to $3,576 billion in April 2019 despite the uncertainty created by the result of the EU referendum that took place just two months after the 2016 BIS survey research was completed. The UK accounted for 43% of global FX activity in April 2019.

China growth

Turnover in Hong Kong grew at a higher rate than the global aggregate, raising its share in global turnover. Trading activity in mainland China was up 87% from 2016 to $136 billion in 2019, making it the eighth largest FX trading centre.

Renminbi trading increased in line with aggregate market growth, so the Chinese currency did not climb in the global rankings. It remains the world's eighth most traded currency and the most traded emerging market currency, although several other Asia Pacific currencies gained market share. Turnover in the Hong Kong dollar has more than doubled over the last three years and the currency has climbed to ninth place in the global ranking, up from 13th in 2016.

Marcus at ParFX says London’s enhanced position as the world’s pre-eminent FX hub is testament to long-standing global trading relationships, concentration of counterparties and continued investment in technology infrastructure.

“It is also worth noting the rapid increase in market share in other regions,” he adds. “Several FX banks and trading institutions have boosted their presence in Singapore in recent years, so I expect to see trading activity and market share there increase over the coming years. Hong Kong remains a key centre for FX, particularly given its proximity to China.”