BIS Survey Shows OTC Derivatives Turnover Up To $171 Billion In UK

LONDON--The UK dominates other global financial centres in OTC derivatives trading, according to preliminary results of the Bank for International Settlements' triennial derivatives market survey. Financial institutions in the UK turned over some $171 billion worth of OTC derivatives on an average day last April, according to the Bank of England (BOE). This compares to daily turnover figures of $91 billion in the US, $46 billion in France and $42 billion in Japan.

The UK's $171 billion figure for 1998 compares with $74 billion three years ago--an annualized growth rate of 32 per cent, or 131 per cent over the three years.

The turnover figures were released simultaneously last Tuesday by all 43 central banks participating in the BIS survey. The BIS began collating snapshot figures on OTC derivatives turnover for the first time in the April 1995 survey (FXW, January 8, 1996). Full results from 17 countries have been posted on the BIS's World Wide Web site, located at http://www.bis.org.

John Footman, the BOE's deputy director of finance structure, stresses that the derivatives turnover figures measure notional value only--the actual sums of cash changing hands are orders of magnitude smaller.

Footman also cautions that the national figures shouldn't be aggregated, since cross-border trades would then be double-counted. The BIS is currently working on collating regional results into a global picture, he adds. Preliminary turnover data is due for release on October 19, while full results for derivatives positions outstanding will be published in December.

The UK's 32 per cent annual growth rate in derivatives turnover compares with other European financial centres, where annualized growth rates of France, Germany and Switzerland are 27 per cent, 38 per cent and 53 per cent, respectively.

The US OTC derivatives market is also expanding, although not as quickly. The Federal Reserve Bank of New York reports $91 billion in daily derivatives turnover in April this year, as compared to $52 billion three years ago--a rise of 75 per cent, or 21 per cent on an annualized basis.

In contrast, Asian financial centres reported slower growth. Japan's derivatives turnover of $42 billion represents a 28 per cent rise from three years ago, or 9 per cent per year. Singapore and Hong Kong report falls in turnover. Singapore dropped from $18 billion in April 1995 to $11 billion this year--an annualized fall of 15 per cent. Hong Kong reports $4 billion in derivatives turnover, representing a fall of 4 per cent per year.

The BIS's reporting methodology categorizes OTC derivatives into five classes: interest rate FRAs, interest rate swaps, interest rate options, currency swaps and currency options. These classes don't differentiate between vanilla and exotic instruments, says a BoE spokesperson, and no data is available on the turnover breakdown between the two.

Interest rate swaps account for some $68 billion of OTC derivatives turnover in the UK, 40 per cent of the overall UK market. FRAs and currency options take up 25 per cent each, with interest rate options and currency swaps accounting for 7 per cent and 3 per cent, respectively.

This product breakdown points to a significant shift away from FRAs towards interest rate swaps, says Footman. FRAs make up 47 per cent of the UK's OTC derivatives turnover in the 1995 survey, with swaps coming in at 25 per cent.

Most of the interest rate instruments traded in the UK involve EMS currencies, adds Footman. The Deutsche mark has a 32 per cent share of interest rate derivatives turnover, with other EMS currencies accounting for a further 24 per cent. The US dollar and sterling account for 16 per cent and 13 per cent, respectively--showing that the bulk of OTC interest rate derivatives activity in the UK stems from non-domestic business.

The Fed reports a somewhat different product breakdown in the US: forex options account for $32 billion of its derivatives turnover, a 35 per cent share, and interest rate swaps account for a 34 per cent share. FRAs, interest rate options and currency swaps account for the remaining third. Moreover, some 80 per cent of derivatives traded in the US are dollar denominated in at least one leg, pointing to a primarily domestic-driven derivatives industry in the US.

The BoE's survey includes a breakdown of interest rate and currency derivatives turnover by counterparty. Just under half of all derivatives transactions in the UK are cross-border interbank trades, according to the BoE figures. Domestic interbank trades account for a further 24 per cent share.

Footman notes that the counterparty breakdown shows a significant rise in derivatives trading among non-bank financial institutions. The "other financial institutions" category accounts for 21 per cent of this year's UK derivatives turnover--which compares with a 10 per cent share three years ago. Business with non-financial institutions remains roughly constant in terms of marketshare--6 per cent this year as compared to 5 per cent three years ago.

The Fed reports a similar counterparty breakdown. Some 46 per cent of OTC derivative trades in the US are conducted between "reporting dealers", with 37 per cent between a dealer and another financial institution. Non-financial customers take up a larger slice of the market in the US compared to the UK; however, 17 per cent of derivatives trades are conducted between a reporting dealer and a non-financial institution.

Both the BoE and the Fed report a greater concentration of derivatives activity in the hands of the major players. The top 10 firms in the US account for 84 per cent of US derivatives turnover. The UK's top 10 took up a 67 per cent share of the London market, as compared to 52 per cent three years ago.