Information Release 1 September 2010 Central Bank Survey of Foreign-Exchange and Derivative Market Activity The Central Bank today (Wednesday 1 September) publishes the results of a survey of foreign-exchange and derivative market turnover in Ireland. The survey, conducted on turnover in the month April 2010, is part of an international study coordinated by the Bank for International Settlements (BIS) and involved 52 other central banks and monetary authorities. The survey is conducted every three years, with the last undertaken in April 2007. The following are the key findings of the survey of the Irish market 1 : In absolute terms, there was an increase in turnover in the foreign-exchange market in Ireland between April 2007 and April 2010. 2 While an increase in spot transactions drove the growth of the global foreignexchange market, spot transactions declined in Ireland by 10 per cent. Foreign-exchange swaps were the main contributor to the rise in activity in the over-the-counter (OTC) foreign-exchange derivatives market, followed by outright forwards. The turnover in OTC interest rate derivatives increased for the first time since 2004. 1 Some of the changes between the two surveys can be explained by difference in the list of reporting institutions participating in the 2010 survey. Institutions with sales desks located in Ireland were invited to participate in the 2010 survey, which resulted in 20 credit institutions completing the survey. A sample of 21 institutions participated in the 2007 survey. A list of reporting institutions can be found on the Central Bank website. 2 Adjusted for local double-counting. 1
Overview In June of this year, the Central Bank collected data on turnover with reference to April 2010 in traditional foreign-exchange markets (spot, outright forwards, foreign-exchange swaps, currency swaps and currency options) and in OTC interest-rate derivatives (forward-rate agreements, interest-rate swaps and interest-rate options) from resident credit institutions with sales desks located in Ireland. The BIS is publishing preliminary aggregated global results of the survey today 3 and participating countries are simultaneously publishing their national results. This release contains a summary of the main findings of the Irish results. Tables containing the Irish results are reported in full on the Central Bank s website (www.centralbank.ie). Global survey results and methodological details can also be accessed from this site. Previous triennial surveys have used the expression traditional foreign-exchange markets to refer to spot transactions, outright forwards, and foreign-exchange swaps. This expression excluded currency swaps and currency options. Beginning with the 2010 survey, the expression foreign-exchange markets will include all five foreignexchange instruments. Moreover, there will be a further breakdown between spot transactions and related OTC foreign-exchange derivative instruments (outright forwards, foreign-exchange swaps, currency options and currency swaps). Foreign-Exchange Market Turnover The survey found an increase in activity in the foreign-exchange market between April 2007 and April 2010. Foreign-exchange market turnover was 27 per cent higher in April 2010 than in April 2007. This was driven by foreign-exchange swaps, which increased from an average daily turnover of US$6.1 billion to US$7.6 billion between the two surveys, and outright forwards, which increased from an average daily turnover of US$710 million to US$2 billion. Foreign-exchange spot turnover declined between the two surveys. This is in contrast to the results of the global survey where the increase in spot market turnover accounted for three-quarters of the overall increase in the global foreign-exchange market relative to the previous survey. Similar to the global survey, spot trading with 3 The preliminary results of the global survey can be accessed at http://www.bis.org/publ/rpfx10.htm. 2
other financial institutions increased between the two surveys in Ireland, but trading with reporting dealers declined, leading to a small decrease in spot turnover. Trading activity in OTC foreign-exchange derivatives continued to increase in Ireland, driven by more active trading in foreign-exchange swaps, particularly USD/EUR and EUR/GBP currency pairs. In addition, there was a strong increase in turnover in outright forwards. Foreign-exchange swaps became the most actively traded instrument in the total survey in April 2010 in Ireland, whereas in April 2007 interest-rate swaps were the most actively traded instrument. Foreign-exchange swaps are widely used by banks to raise liquidity across money markets denominated in different currencies. Currency swaps also increased, but currency options declined substantially, from a turnover of US$8.9 billion in 2007 to US$1.5 billion in 2010. The biggest driver behind the higher turnover in the global foreign-exchange market in April 2010, from a counterparty perspective, was trading with other financial institutions. While trading with reporting dealers also increased substantially between the two surveys in Ireland (mainly in foreign-exchange swaps), there was a larger increase in trading with other financial institutions, mostly in spot transactions and outright forwards. Foreign-exchange trade with other financial institutions grew to US$111.9 billion, from US$70.5 billion in April 2007. In the global results, transactions with other financial institutions surpassed inter-dealer transactions; this was not mirrored in the Irish results, with inter-dealer trades remaining above those with other financial institutions. On a geographical basis, turnover with local counterparties increased in importance between the two surveys, and accounted for nearly 11 per cent of turnover in foreign-exchange derivatives in April 2010. The currency composition of turnover between the two reporting periods saw a reduction in the total turnover of which the US dollar was one side of a currency pair. This stood at 79 per cent of total turnover in foreign-exchange derivatives in April 2007, but declined to 68 per cent in April 2010. 4 The euro gained in importance as one side of a currency pair over the period, from 45 per cent in April 2007 to 70 per cent in April 2010. Turnover by currency pairs showed a large increase in the dominance of the USD/EUR, with a 42 per cent share in April 2010. The EUR/GBP 4 Because each transaction involves two currencies, the shares add up to 200 per cent. 3
share also increased, from 9 per cent in April 2007, to 19 per cent in April 2010. The USD/CAD currency pair was significant in the April 2007 survey, with a share of 15 percent, but this fell to a low of 1 per cent in April 2010. Interest Rate OTC Derivative Market Turnover The instruments in the OTC interest rate derivatives category are forward-rate agreements (FRAs), interest rate swaps and interest rate options. Results for the global survey show that trading activity in the OTC interest rate derivatives market increased by 24 per cent since the last survey, but this represented a slowing of the rapid growth seen over the previous four surveys. In Ireland, the increase was more modest at 6.6 per cent. Trading activity in these instruments increased marginally in Ireland since the last survey, but average daily turnover actually declined, from US$7.3 billion in April 2007 to US$7 billion in April 2010. All of the increase in turnover in interest rate derivatives was in FRAs, where market participants contract an interest rate for a set period of time in the future. Total turnover increased from US$2 billion in April 2007 to US$18.6 billion in April 2010. Much of the increase in FRAs was due to an increase in euro, sterling and Swedish krona denominated contracts. In contrast, turnover in interest-rate swaps declined from US$133.3 billion in April 2007 to US$128.6 billion in April 2010. Within this, there was a large decline in US dollar contracts, but a large rise in euro contracts. Japanese yen and Swedish krona also fell, while Canadian dollar denominated contracts rose. Turnover in interest rate options was minimal in April 2010, falling to US$260 million from US$3.1 billion in 2007. Turnover with non-financial customers in OTC interest rate derivatives declined substantially between the two surveys. This accounted for 18 per cent of Irish turnover in April 2007, but stood at just 1 per cent in April 2010. Both trade with other reporting dealers and other financial institutions increased between the two surveys. Almost all trading in OTC interest-rate derivates was on a cross-border basis; turnover on a local basis fell to 2 per cent in April 2010, from 25 per cent in April 2007. 4
Notes While the triennial derivatives survey collects information on turnover for the month of April, care should be exercised when making comparisons on two months data. In addition, the reporting population differs between surveys due to some entrants to and leavers from the market. A large reporting institution in the April 2007 survey no longer has a sales desk located in Ireland, and therefore did not participate in the April 2010 survey. However, the coverage of the April 2010 survey was more comprehensive than previous surveys, and will provide a stable reporting population for forthcoming surveys. More detailed tables and analysis of the results will be published in a forthcoming Quarterly Bulletin. 5