BIS Releases Final Turnover Figures For Triennial FX & Derivatives Survey

More than a year after the survey itself was taken, the Bank for International Settlements (BIS) has at long last published the final version of its report on the triennial central bank survey of FX market activity.

The report this year was even more delayed than that for the April, 1992 survey (which appeared in March 1993) because it includes results for the massive, new survey on derivatives activity, which FX Week will cover next week.

The report includes revised figures for overall turnover after adjustment for double-counting and estimated gaps in reporting, bringing the average daily volume in FX instruments to about $1.2 trillion in April 1995. This average represents growth of some 45 per cent over the three-year period, faster than in 1989 to 1992, says the report.

However, in constant dollars, the growth rate would be only 30 per cent, about the same as last time around. Spot trades grew by 30 per cent, doubling their rate of growth, but forwards and FX swaps grew by 60 per cent and now represent 56 per cent of transactions.

The report shows an increasing focus on customer business in major centres in that the share of outright forwards in the market grew by one percentage point to 7 per cent. Outright forward business in the US doubled over the period, accounting for much of the growth.

Surprisingly, the report shows that the dollar has gained ground slightly since 1992, traded on one side of 83 per cent of all transactions, up from 82 per cent, while the Deutsche mark's share fell to 37 per cent from 40 per cent last time.

The report suggests that the decline may be due to the withdrawal of several countries such as the UK and Italy from the Exchange Rate Mechanism in late 1992. Sterling's share fell from 14 to 10 per cent, while that of the French franc doubled from 4 to 8 per cent, overtaking the Swiss franc as the fifth most widely-traded currency.

The dollar dominates the forward market, appearing on one side of 97 per cent of trades to the DM's 20 per cent. The DM is strongest in the spot market: 57 per cent of trades have the DM on one side, while the dollar appears on 69 per cent. Trading in the forward market is much more diverse than in spot, where the 10 biggest currency pairs account for 77 per cent of the market.

The report shows that the trend of globalization continues, with cross-border trades, at 54 per cent of the total, now outnumbering strictly local ones worldwide.

The proportion of trades done with funds and investment banks again rose, by eight percentage points, while the share done with other dealers and non-financial customers dropped slightly.

The UK market, as the largest and most liquid with 30 per cent of worldwide volume, shows the largest percentage of trades done between local dealers.

The growth of London's dominance continues. More trading in the dollar (30 per cent) and the Deutsche mark (28 per cent) takes place in London than in either the US (16 per cent) or in Germany (10 per cent), with London's share of DM trading increasing despite the slow growth of sterling/mark trades.

In the French franc, 31 per cent of trading is done in London, compared with 25 per cent in Paris. It also dominates trading in Ecu and other EMS currencies. In yen, Swiss franc, Canadian and Australian dollars, London is the second-most important centre for trading after their own domestic markets, says the report. London has the highest proportion of trading in non-domestic currencies, at 84 per cent.

The report notes the growth of electronic broking in FX spot, which now accounts for 6 per cent of total FX market turnover in the US, 5 per cent in the UK and 4 per cent in Tokyo.

Market concentration has again increased: the top 10 banks now account for 44 per cent of trading in London, 47 per cent in the US and 51 per cent in Tokyo.

In its analysis of international banking and financial market developments, the BIS found that detailed international banking data collected for the fourth quarter of 1995 confirm the loss of momentum in interbank business in the course of the year, after the peak recorded at the turn of 1994-95. This points indirectly to some overall dampening of leveraged securities and currency transactions by banks' customers.

International banking activity during the fourth quarter of 1995 featured two other important developments, says the BIS. Firstly, the "Japan premium" which had emerged in the summer and peaked in October-November was associated with a further decline in Japanese banks' presence in other industrial countries. Secondly, the continuing strong pace of bank lending to Asian countries, and to Thailand in particular, meant a record volume for the year, and this was accompanied by a further recovery in bank lending to Latin America.

The BIS stresses, however, that while Asian countries relied heavily on short-term banking funds for their financing needs last year, the return to favour of Latin American borrowers after the first quarter was more pronounced in the international securities markets, where risks are more widely spread and less dependent upon the health of the local banking systems.

The reported data on OTC derivative instruments, which will follow in next week's issue, covered about 90 per cent of intermediaries active in this market, included notional amounts and market values on March 31, 1995 in the four main categories of market risk -- foreign exchange, interest rate, equity and commodity -- as well as turnover during April 1995 in FX and interest rate products.

After adjustment for double-counting resulting from inter-dealer transactions and gaps in reporting, the notional amounts and gross market values of OTC derivative contracts were estimated at $47.5 trillion and $2.2 trillion respectively at end-March 1995, compared with the preliminary totals of $40.7 trillion and $1.7 trillion quoted in the December 1995 BIS press release, which excluded any estimates for gaps in reporting (FXW, January 8). Global daily turnover in OTC FX and interest rate products during April 1995 amounted to some $900 billion.