BIS Triennial Bank survey – the effect of more globalization

The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity in April 2007 was released, http://www.bis.org/publ/rpfx07.pdf. Done every three years, this is the most comprehensive survey of foreign exchange trading turnover. This is a pretty dry report but it provides some interesting insight in the foreign exchange market. I came away with three major observations.

First, the growth of trading in these markets has not abated. Since the last survey, there has been continued double digit growth in overall trading. In many ways, this should not be surprising given the continued increase in global trade and economic growth. From the capital account side, the continued globalization of capital markets surely has been a driver for the increases in foreign exchange trading. The move to international diversification which has continued over the last three years provides the background for hedging and speculative trading. However, this growth is still surprising given the relatively low volatility environment for currencies. This trading growth is structural and not a function of the market environment.

Second, trading has become more disperse across currencies. The dollar is still dominant with the euro and yen following behind, but emerging market currencies are growing in importance. Again, the increase in globalization has lead to further dispersion in trading across currencies. The percentage of transaction between USD and currencies other than G10 has moved from 16 to 19%. That being said, many currencies represent a small fraction of trading. There has been a sizable increase in OTC interest rate derivatives in yen and sterling. Japan is seeing growing cross border business base don carry and the movement of domestic money offshore.

Third, there continues to be a change in the distribution of trading across players and maturities. London is still the largest center for FX trading at 34% followed by the US at 16%. The percentage of total OTC derivative transaction volume for London is even higher at 42%. Again, the US is second. However, the amount of trading with dealers continues to decline. The market has moved away for a dealer structure to one that involves trading outside the normal reporting bank-dealer network. The market microstructure continues to evolve with electronic trading growing in importance.