The much anticipated Bank for International Settlements (BIS) Triennial Survey of FX Market Turnover for 2004 confirms what many in the market have suspected, the FX market has grown immensely over the past three years. Turnover data shows that average daily FX volume rose from Usd 1.2 trillion in 2001 to Usd 1.88 trillion in April 2004, a 57% increase at current exchange rates and a 38% increase using 2001 exchange rates.
The surge was driven heavily by a 60% increase in spot FX turnover from Usd 387 billion per day in 2001 to Usd 621 billion this year, although growth was seen in outright forward (up Usd 77 billion per day to Usd 208 billion) and forward swaps (Usd 288 billion per day to Usd 944 billion). All sectors reported the highest average daily turnover since the BIS started to collate the data from the world’s central banks in 1989.
Perhaps more importantly for the FX market, today’s data shows that the market has rebounded from the post-euro dip in 2001, compared to the previous high-water mark in 1998, overall volume has risen by Usd 390 billion per day. It is also interesting to note that in 2001 there were fingers pointed at e-commerce as a factor in the decline in volume, this has clearly been refuted as e-commerce has permeated the market to a much greater extent during the past three years.
A major factor in the growth is the proportion of business with the buy side. Average daily turnover with “other financial institutions” (in BIS speak this normally refers to the fund management sector and broker-dealers) rose by Usd 256 billion per day to Usd 585 billion. This accurately reflects the growth in interest in FX on the part of the hedge fund segment of the market that has increasingly come to view FX as an excellent portfolio diversification tool.
There was also growth in turnover with “non-financial customers” “the corporate sector typically” which saw volume grow by Usd 96 billion per day to Usd 252 billion. This reflects, market sources say, the move by a large number of corporates to actively hedge exchange rate risk, following a series of losses resulting from the wide swings in the value of the dollar during 2001-2003.
Overall dealing with the buy side amounts to Usd 837 billion, a greater amount than total turnover in the 1992 survey and 47% of all turnover in the current survey. This in turn is an increase from 2001 when 39% of turnover emanated from the buy side. Trading between reporting dealers’ the interbank market and now also those with white label agreements, also rose strongly, from Usd 689 billion to Usd 936 billion, however this represents a dilution in the percentage of overall trading to 53%. By contrast, in 1995 and 1998 it represented a 64% market share and in 2001 a 59% market share.
In geographical terms, the UK remains the major centre for FX with 31.3% of daily turnover in the UK (up from 31.2% in 2001). Further reflecting the growth in trading by the fund management community; however, the Federal Reserve Bank reports that US-based share of FX turnover rose strongly from 15.7% in 2001 to 19.2%.
Even more unsurprising was the reported growth in derivative turnover. Data for outstanding balances in this market segment is produced half-yearly by the BIS and has shown consistent growth for the past three years. In the 2004 triennial survey, total derivative market turnover rose from Usd 575 billion in 2001 to Usd 1,220 billion. FX turnover rose to Usd 140 billion from Usd 67 billion in 2001″ in the interest rate segment, turnover rose from Usd 489 billion in 2001 to Usd 1,025 billion.
The buyside was again responsible for much of the surge, other financials rising more than threefold from Usd 159 billion in 2001 to Usd 499 billion in 2004. Corporate interest also grew well from Usd 43 billion to Usd 103 billion. Again this means that buy side interest is responsible for around 50% of all OTC derivative market turnover.