The latest triennial survey of the FX industry by the Bank for International Settlements (BIS) has revealed a decline in volumes for the first time in 15 years.
The conclusions of the survey are broadly in line with the findings of the Euromoney FX Survey 2016 earlier this year. Headline volumes are down, but emerging market (EM) currencies are a bright spot, with the BIS survey showing the rising importance of the Chinese renminbi and some Asian-Pacific currencies.
This year's Euromoney FX Survey of 3,500 clients found that global trading volumes had fallen almost a quarter (23%) year-on-year, but EM trading volumes had bucked the trend, with 5% year-on-year growth. The BIS's headline numbers are less stark, but show the same trends.
The BIS survey analyses central-bank data from 1,300 banks and other dealers across 52 jurisdictions, comparing figures compiled from April 2016 with those from April 2013. It offers a useful bird's eye view of a bilateral market that lacks the visibility of exchange-traded markets.
Global currency trading volumes averaged $5.1 trillion per day in April 2016, a 5.6% fall from exactly three years earlier. The BIS points out there was a spike in yen trading activity in April 2013 due to monetary policy developments; the Bank of Japan had just initiated its mammoth monetary-easing policy.
Nevertheless, the fall in volumes is evidence of a broader slowdown. For the first time in 15 years, spot turnover – the simple exchange of one currency for another – tumbled. These transactions fell 15% to $1.7 trillion per day in April 2016 compared with $2 trillion in April 2013. This was partially offset by an increase in derivatives trading.
A number of factors for the slowdown were cited by FX market professionals in their responses to the Euromoney FX Survey: the increased cost of market making; difficult trading conditions; and the impact of investor money moving away from active management towards passive investment, among other reasons.
Non-reporting banks – classified as 'other financial institutions' – dominate currency markets, accounting for more than half (51%) of the BIS turnover. This includes pension funds and insurers, which are becoming more active in FX markets. These institutional investors were on one side of 16% of daily turnover in April 2016, up from 11% in 2013.
On the flip side, hedge funds and proprietary trading firms are shunning FX trading, in line with the Euromoney survey's findings that their activity is continuing to shrink.
Average daily spot turnover with hedge funds and proprietary trading firms on one side of the trade stood at $200 billion in April 2016, a steep fall of almost a third (29%) compared with the 2013 survey. They also traded significantly fewer outright forwards and swaps, which plummeted by 29% and 37%, respectively.
Meanwhile, the renminbi doubled its market share to 4%, to become the world’s eighth most actively traded currency. A number of other Asia-Pacific currencies also boosted their market share, including the Korean won, Indian rupee and Thai baht.
London's crown slipping
London has long been the global hub of FX, the jewel in the crown that is the city's reputation as the world's leading financial centre. However, the BIS figures show this crown is slipping somewhat as Asia-Pacific countries start to tug at its market share.
The UK's share of FX trading fell by a 10th to 37% in April 2016, while that of the US remained virtually unchanged, at 19%. However, Asian financial centres – Tokyo, Hong Kong and Singapore – increased their combined share from 15% in 2013 to 21%.
It remains to be seen what further impact the UK’s eventual exit from the European Union will have on the capital's grip on the FX market.
Furthermore, the industry is in deep regulatory turmoil. Currency dealers are facing the growing wrath of US regulators over the currency rigging scandal, with investigations taking a dark turn. The regulatory response has turned from billion-dollar fines to the threat of imprisonment.
Last month, HSBC's global head of FX cash trading, Mark Johnson was arrested by the Federal Bureau of Investigation and charged with wire fraud and conspiracy charges over a multi-billion dollar currency deal. Stuart Scott, HSBC's former head of FX cash trading for Europe, the Middle East and Africa faces the same charges. Both have pleaded not guilty.
Most recently, the US Federal Reserve has banned ex-Barclays trader Christopher Ashton from working in banking in the US. The former global head of the bank's spot trading business was also fined $1.2 million for colluding to manipulate FX benchmarks.