Currency derivatives turnover soars ahead

Trading in over-the-counter (OTC) currency and interest rate derivatives rose by 112% since 2001 – although the market share of reporting dealers has fallen, according to the survey.

Although trading volumes by reporting dealers – defined in the survey as companies that are "mainly large commercial and investment banks, and securities houses that either participate in the inter-dealer market or have active business with large customers" – have risen, they have seen their market share decline to 48% from 64% in 2001.

This is matched by a rise in derivatives use by smaller commercial banks, mutual funds, hedge funds and insurance companies, which the survey attributes to the turbulent nature of financial markets since 2001. The market share of these non-reporting financial institutions rose to 43% of OTC turnover, up from 29% in 2001, leaving them similar in size to the reporting dealers. The remainder of the market represents end-users such as corporates and governments, which have seen their share of activity increase by 216% to a daily average of $79 billion.

Exchange-traded derivatives volumes rose by a similar amount: 120% for currency derivatives and 108% for interest rate derivatives. The survey claims the OTC market’s increase reflects broader market factors rather than a shift away from exchange trading.

FX derivatives alone were up 109% to $140 billion per day, although the sector’s total share of the OTC derivatives market remained fairly static at 12%. Trading was boosted by dollar contracts, especially dollar/euro and dollar/yen pairings, up 124% and 58% respectively. Turnover for other euro-denominated contracts rose 130% to $23 billion per day. Currency options, the largest group of non-traditional foreign exchange products, exhibited a trading increase of 95% to $117 billion. Currency swaps trading hit $21 billion, up 200%.

Interest rate contracts, the largest sector of the OTC derivatives market, grew in volume by 110%, boosted by a 128% rise in US dollar-denominated activity. Interest rate options now represent 17% of the market, tripling in size since 2001. Trading in both forward rate agreements (FRAs) and interest rate swaps roughly doubled. The increases in interest rate derivatives trading can be partially explained by the shift in expectation about future US interest rates during April. US dollar-denominated options grew by 675% to reach $91 billion.