19 December 2007

BIS Triennial Central Bank survey of foreign exchange and derivatives market activity

The BIS published its 2007 Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity Report which shows a substantial increase in turnover in foreign exchange and OTC derivatives markets.

Turnover in traditional foreign exchange markets increased by 71% between April 2004 and April 2007 to reach $3.2 trillion. Activity in OTC derivatives markets was vibrant in April 2007. Average daily turnover in OTC foreign exchange and interest rate contracts went up by 74% relative to the previous survey in 2004, to reach $4.2 trillion in April. Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007 and gross market values of OTC derivatives, which refer to the cost of replacing all open contracts at the prevailing market prices, increased at a considerably lower rate (74%) than notional amounts during the reporting period, to $11 trillion at the end of June.

Foreign exchange market turnover

The April 2007 data on turnover in traditional foreign exchange markets highlight several important features of the evolution of these markets.

First, average daily turnover has grown by an unprecedented 71% since April 2004, to $3.2 trillion.

Second, growth in turnover was broad-based across instruments. More than half of the increase in turnover can be accounted for by the growth in foreign exchange swaps. Changes in hedging activity may have been one factor underlying the increasing importance of foreign exchange swap instruments.

Third, the composition of turnover by counterparty changed substantially. Transactions between reporting dealers and non-reporting financial institutions, such as hedge funds, mutual funds, pension funds and insurance companies, more than doubled between April 2004 and April 2007 and contributed more than half of the increase in aggregate turnover.

Fourth, the currency composition of turnover has become more diversified over the past three years. The share of the four largest currencies fell, although the US dollar/euro continued to be the most traded currency pair.

Finally, the geographical distribution of foreign exchange trading did not change significantly. Among countries with major financial centres, Singapore, Switzerland and the United Kingdom gained market share, while the shares of Japan and the United States dropped.

OTC derivatives notional amounts and gross market values

Positions in OTC derivatives grew at an even more rapid pace than turnover. Notional amounts outstanding went up by 135% to $516 trillion at the end of June 2007.

Growth accelerated in all risk categories. The highest rate of increase was reported in the credit segment of the OTC derivatives market, where positions expanded to $51 trillion, from under $5 trillion in the 2004 survey.

Press release

Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity

© Graham Bishop