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The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2010 Federal Reserve Bank of New York Turnover in the United States, April 2010 The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United States, April 2010 Background The Federal Reserve Bank of New York together with fifty-three other central banks conducted a survey of turnover in the over-the-counter (OTC) foreign exchange and interest rate derivatives markets for April 2010. This worldwide, cooperative effort is undertaken every three years and is coordinated by the Bank for International Settlements (BIS). The “triennial survey” is a comprehensive source of information on the size and structure of the OTC foreign exchange and derivatives markets. These markets trade private, bilateral contracts; therefore, no turnover statistics are available, as they are for the organized exchanges. (Data for exchangetraded futures and options are excluded from the survey.) To measure the OTC markets, the dealers that make markets in foreign exchange and interest rate derivatives reported trading volumes for April 2010 to the central banks in the countries where they are located. The participants reported separately the volume of trading they conduct with each other to permit adjustments for double reporting. The central banks then compiled national aggregates from the dealers’ data and the BIS compiled global totals from the central banks’ national data.1 (See Annex I for a complete description of survey terms and methods.) In 2010, a total of twenty-four dealers in the United States participated in the foreign exchange part of the survey and nineteen in the interest rate derivatives part, down from thirty-three and twenty-eight, respectively, in 2007. The decline is attributable to the consolidation of firms in 2008 and the exit of some dealers from the U.S. market. Participating dealers were commercial banks, U.S. offices of foreign banking organizations, and securities brokers/dealers. They were U.S.-owned institutions as well as foreign-owned institutions with dealing operations in the United States. (See Annex II for a list of participating dealers.) This report discusses turnover in foreign exchange (FX) spot, forwards, and swaps as the foreign exchange part of the survey. Trading in forward rate agreements (FRAs), currency and interest rate swaps, foreign exchange options, and interest rate options are then discussed together as the interest rate derivatives part of the survey. Aggregate data are included as Annex III. After double reporting of trades between participating dealers has been adjusted for, daily foreign exchange turnover in the United States (spot, 1 Visit http://www.BIS.org for the BIS report on global turnover. 1 Turnover in the United States, April 2010 2 forwards, and FX swaps) averaged $817 billion in April 2010, an increase of 23 percent from the 2007 survey. See Chart 1. Chart 1: Daily U.S. Foreign Exchange Turnover Includes Spot, Forwards, and FX Swaps. In $ billions equivalent. 900 800 700 600 500 400 300 200 100 0 Unadjusted Adjusted* 870 709 508 405 295 183 461 77 58 664 230 351 167 129 817 287 244 254 1986 1989 1992 1995 1998 2001 2004 2007 2010 * Adjusted for double reporting by participating dealers. Daily turnover for the other derivatives markets covered by the survey (FRAs, interest rate swaps, cross-currency swaps, and foreign exchange and interest rate options) averaged $659 billion, up 9 percent. See Chart 2. Chart 2: Daily U.S. FX and Interest Rate Derivatives Turnover Includes currency swaps, FX options, FRAs, interest rate swaps, and options. In $ billions equivalent. 800 Unadjusted 700 Adjusted* 712 720 600 500 400 423 300 167 200 64 110 100 52 91 135 0 1995 1998 2001 607 659 2007 2010 355 2004 * Adjusted for double reporting by participating dealers. Turnover in the United States, April 2010 The U.S. Foreign Exchange Market Daily foreign exchange turnover in the United States increased 23 percent from 2007 to $817 billion,2 continuing the strong growth reported in past surveys. At constant exchange rates, turnover increased 28 percent since 2007.3 Factors contributing to increased turnover included continued growth in market participation, especially through prime brokerage flows. Rising volumes were also supported by a return to more active management of currency risks and investment portfolios by corporations and portfolio managers as the credit crisis abated and financial market sentiment improved. Dealers continued to invest heavily in technology, building advanced electronic trading and risk management platforms to accommodate a growing customer base. The 2010 survey was conducted during a period of heightened sensitivity to sovereign fiscal concerns, especially among the euro-periphery countries. The subsequent increase in volatility among many euro pairs resulted in increased trading volumes as investors looked to more actively manage portfolios and hedge investment exposures with sentiment toward some euro-area financial markets waning. Instruments Of the three instruments that are considered together as foreign exchange turnover, spot trading increased the most, by 52 percent. Turnover in FX swaps rose 12 percent and FX forwards increased 2 percent from the 2007 survey. See Chart 3. This total is adjusted for the double reporting of transactions between participating dealers in the United States. 3 Foreign currency amounts are reported in dollar terms. See Annex I. 1 f) for a description and explanation of the effect of exchange rate changes. 2 3 Turnover in the United States, April 2010 4 Chart 3: Daily Foreign Exchange Turnover by Instrument In $ billions equivalent. 500 450 400 350 300 250 200 150 100 50 0 Spot 1992 Average Maturity 1995 Forwards 1998 FX Swaps 2001 2004 2007 2010  Spot trading represented 55 percent of total foreign exchange turnover, up from 47 percent in 2007.  FX swaps trading represented 31 percent of turnover, down from 36 percent in the prior survey.  Outright forward transactions declined slightly to 14 percent of turnover, from 17 percent in the 2007 survey. FX swaps and forwards were reported by original term to maturity, with three categories of maturity buckets (seven days or less, over seven days and up to one year, and over one year). For both instruments, the data illustrate the relatively short-term nature of the products. More than 98 percent of the FX swaps reported in the survey were arranged with a maturity of less than one year. The majority of foreign exchange swaps, 71 percent, were reported within the seven-days-orless maturity bucket. See Chart 4. Nearly 99 percent of the outright forward transactions were reported in the one-year-or-less maturity bucket. The majority of reported outright forward transactions, 60 percent, had an original maturity of more than seven days but no more than one year. See Chart 4. Turnover in the United States, April 2010 5 Chart 4: Maturity Distribution of FX Forwards and Swaps In Percent Over one year 100 90 Over seven days to one year 2 1 27 80 70 Seven days or less 60 60 50 40 71 30 20 39 10 0 FX Forwards Currencies FX Swaps  The U.S. dollar was traded in 87 percent of all transactions, up from 83 percent in the last survey.  The euro was the second most actively traded currency and was on one side of 42 percent of all trades in the U.S. market, up from 38 percent in April 2007.  The most actively traded currency pair was the dollar/euro, which accounted for 31 percent of U.S. market turnover. See Chart 5.  Yen trading declined slightly to 16 percent from 17 percent and remained the third most actively traded currency. Turnover in the United States, April 2010 6 Chart 5: Daily FX Volume by Currency Pair In $ billions equivalent. 300 32.0 250 Percent of total turnover 200 150 12.8 100 12.0 9.7 8.6 5.3 50 6.2 3.9 2.4 0.8 2.0 1.6 2.5 0.7 0.3 0.2 0 USD vs. Euro vs. * Residual trades are trades not involving either the dollar or the euro. Market Structure Participating dealers also reported their trading activity according to type and location of counterparties.  Counterparty Type: Half of all reported trades were undertaken with other financial institutions, while 38 percent were conducted with other reporting dealers and the remaining 12 percent were with non-financial customers. See Chart 6. Chart 6: Foreign Exchange Trading by Counterparty Percent of total. Non-Financial Customers Reporting Dealers 12% 38% 50% Other Financial Institutions Turnover in the United States, April 2010  Counterparty Location: Highlighting the international nature of foreign exchange trading, 60 percent of spot, forward, and FX swap transactions were conducted with market participants outside the United States, up from 58 percent in 2007.  Market Share Concentration: Continuing the trend from earlier surveys, the market shares of the largest foreign exchange dealers continued to grow, reflecting consolidation among dealers and banking institutions as well as a declining number of dealers participating in the survey. In the spot market, the market share of the ten firms reporting the highest volumes in the U.S. market increased sharply to 91 percent from 79 percent. The five largest volume reporters accounted for 74 percent of turnover, up from 56 percent. In the foreign exchange swaps market, the top ten dealers accounted for 81 percent of market share, unchanged from the previous survey. The share of the top five increased to 61 percent from 55 percent. In the forward market, the market share of the top ten dealers rose to 88 percent from 86 percent; for the top five dealers, it declined slightly to 58 percent from 59 percent. 7 Turnover in the United States, April 2010 8 Differences between the BIS Triennial Survey and the Foreign Exchange Committee’s Semi-Annual Survey of North American Foreign Exchange Volume Since October 2004, the Federal Reserve Bank of New York has collected and published foreign exchange turnover data on a semi-annual basis on behalf of the Foreign Exchange Committee (FXC), an industry trade group comprised of representatives from leading foreign exchange dealers and sponsored by the Bank. The reporting panel for the BIS triennial survey is slightly larger than the FXC survey’s panel: twenty-five dealers compared with twenty-four. The FXC survey captures turnover in all of North America, including Canada and Mexico; by comparison, the U.S. results in the BIS survey are limited to U.S.-based transactions. However, the specified currency pairs collected in the FXC survey are significantly narrower than those in the BIS survey. The most notable difference between the two surveys is the reporting basis. For the BIS survey, reporting is determined by the location of the sales desk. In contrast, reporting in the FXC survey is determined by the location of the trading desk. Data collected in the FXC survey are limited to spot, outright forwards, foreign exchange swaps, and total foreign exchange options. Currency swaps and single-currency interest rate derivatives are excluded. In addition, the FXC survey expressly excludes relatedparty trades, while certain related-party trading is captured in the BIS survey and identified in aggregate. Other differences include: the content of maturity bucket information, the absence of maturity data for options in the FXC survey, separate reporting of options bought and options sold in the BIS survey, the absence of local/cross-border reporting in the FXC survey. Despite these differences, reported aggregates for the two surveys, conducted simultaneously in April, were very similar: Instrument Spot Outright forwards Foreign exchange swaps Options BIS Survey 451 111 255 FXC Survey 418 104 203 Difference 33 7 52 38 30 8 Note: Figures are daily averages reported in billions of U.S. dollars. Foreign Exchange and Interest Rate Derivatives Markets Daily turnover for the other derivatives markets covered by the survey rose more strongly than did turnover in the traditional foreign exchange contracts. These other derivatives include forward rate agreements (FRAs), interest rate swaps, cross-currency rate swaps, and foreign exchange and interest rate options. Turnover in these instruments averaged $659 billion per day in the United States during April 2010, up 9 percent from the last survey. See Chart 2. Turnover in the United States, April 2010 Instruments 9  Daily turnover for interest rate swaps was $295 billion, a decrease of 7 percent since the last survey. See Chart 7.  Turnover in FRAs jumped by more than 175 percent to $256 billion per day, the second most active trading among these contracts, while turnover in interest rate options fell to $61 billion per day from $115 billion three years ago.  Although the currency swaps market, at $8.7 billion per day, is smaller than the markets for other instruments, turnover increased more than 33 percent since 2007.  Turnover in FX options fell to $38 billion since the last survey. Chart 7: Daily FX and Interest Rate Derivatives Turnover by Instrument In $ billions equivalent. 350 Currency Swaps FX Options 300 FRAs IR Swaps 250 IR Options 200 150 100 50 0 1995 Currencies 1998 2001 2004 2007 2010 U.S.-dollar-denominated contracts and contracts with the dollar on one side accounted for 83 percent of the month’s turnover in these instruments, compared with 87 percent three years earlier.  U.S. dollar contracts represented 74 percent of single-currency interest rate swaps, down from 86 percent in 2007, as turnover in many non-dollar contracts gained on dollar contract trading in 2010. In particular, euro and Canadian dollar contracts rose to 7 percent of the total. Trading in yen rose to 4 percent of the total.