The survey is the product of the BIS coordinated participation of 53 central banks and monetary authorities. Based on market turnover data collected over a one-month period in April from 1,309 reporting banks and other FX dealers, it provides the broadest internationally consistent information on the size and structure of the global FX market. The weighted average coverage of FX markets in the reporting countries rose to 97 percent in 2010 from 96 percent in 2007.
Besides the global FX market turnover, which I will focus on, the BIS survey covers turnover in over-the-counter interest rate derivatives, i.e., forward rate agreements, interest rate swaps and interest rate options. In November, the BIS will publish the final results of the survey. Thirty-one of the 53 central banks and monetary authorities that participated in the survey have published their national results at the same time as the BIS global aggregate results, which are available on the BIS website, but the Turkish Central Bank has not done so yet. So, my review of Turkey’s FX market activity will be limited to the brief, aggregated coverage of the BIS survey.
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Since April 2007, FX market activity has become more global, with the share of cross-border transactions rising from 62 percent to 65 percent in April 2010. Its share has been rising steadily over local transactions during the last five surveys. This trend indicates a closer integration of local FX markets into the global FX market. The survey organizes FX transactions into three groupings: (1) “reporting dealers,” which are mainly large commercial and investment banks that actively and regularly buy and sell currencies on electronic dealing platforms such as Electronic Broking Services or Thomson Reuters for their own accounts or to meet large customer demand; (2) “other financial institutions,” which include non-reporting banks, hedge funds, pension funds, mutual funds, insurance companies and central banks that are not classified as reporting dealers; and (3) “non-financial customers,” which are defined as any other counterparty, mainly non-financial end users, such as corporations and governments. In April 2010, for the first time, the share of inter-dealer, i.e., interbank, transactions in total market activity fell below that between dealers and “other financial institutions,” whose transactions rose 42 percent over the April 2007-April 2010 period. The share of interbank trading in global FX market activity has been declining steadily from 63 percent in 1998 to only 39 percent in 2010.
According to the table provided, global FX market average daily turnover of $3,981 billion, expressed in current exchange rates, was 20 percent higher in April 2010 than in April 2007. This was a much slower expansion compared to the 2004-2007 period, during which the turnover had increased by an unprecedented 72 percent. It is estimated that up to 96 percent of the total FX market average daily turnover is due to transactions in the wholesale market, with the retail market accounting for the remaining 4 percent. The share of the retail market is believed to have been rising, raising regulatory questions, especially about highly leveraged and risky trades by inexperienced and gullible small carry traders who try to exploit international interest rate differences without hedging against FX rate change risk.
Among the five types of FX instruments, spots transactions, involving the exchange of two currencies at a rate agreed on the date of the contract for delivery within two business days, rose by 48 percent during 2007-2010, at the fastest rate, accounting for 37 percent of total market turnover in 2010. The much faster expansion of spot transactions was driven primarily by “other financial institutions,” which accounted for 51 percent of all spot transactions in 2010, up from 39 percent in 2007. This trend has been attributed to the rising share of controversial algorithmic trading, which uses computer programs to determine the timing, price or quantity of trading order without direct human involvement.
FX swaps remained, without much change, the most actively traded FX instrument, at over $1.76 billion in 2010, with up to seven-day FX swaps accounting for 74 percent of the total figure. In an FX swap, two currencies are exchanged on a specific date at an agreed rate (short leg), with a reverse exchange of the same two currencies at a later date at an agreed rate (long leg), the terms of which are determined by a contract at the outset. Banks use FX swaps to raise funds across currency markets. During the 2007-2009 global financial crisis the FX swap market suffered from serious disruptions.
In tomorrow’s column, I will conclude the discussion of the major findings of the BIS survey and emphasize the phenomenal rise of the Turkish lira in the global FX market.
