London’s position as a global hub for forex and derivatives trading has eroded as the British capital faces fierce competition from other major financial centres.
The Bank for International Settlements’ triennial survey released on Thursday found that while the UK remains the most important hub for currency and interest rate derivatives trading, its share in both markets has since declined. the last survey in 2019.
London claimed 38% of global foreign exchange turnover in April 2022, a drop of 5 percentage points since 2019, when its share was 43%. In OTC derivatives, its share fell to 46% from 51% three years ago.
The drop comes as London continues to deal with the financial fallout after Brexit. The UK government plans to further deregulate the City to maintain its appeal to international investors.
The BIS study, known as the Bank of Central Banks, is the most reliable indicator of market activity in over-the-counter markets, where trades are often negotiated privately.
It showed that the average volume of currency trading reached a record $7.5 billion per day in 2022, 14% higher than in 2019.
The BIS said the growth may have been partly due to volatile market conditions in April, when the survey was conducted, as there were large trade inventory imbalances. This meant that banks had to “unload them more frequently on the broker market”.
The interprofessional market, where brokers facilitate transactions between banks and other financial institutions, accounted for 40% of the spot market and 54% of the derivatives markets. London’s share went largely to the United States and Singapore. BIS data is based on where sales are initiated or traded electronically.
Over-the-counter (OTC) derivatives trading fell 19% globally from 2019 to $5.2 billion a day, largely because the swap market had started to move away from the rate of tarnished Libor loan. Traders had little recourse to forward rate agreements, which they use to manage their exposures to Libor rate movements. FRA revenue plunged 74% to $500 billion.
This hit market share in London and the United States, as business grew in Asia. “Euro swap turnover has shifted from the UK to the eurozone,” he added.
London-traded FX swaps have boomed in recent years as investors shift to dollar assets, hedging their exposure with swaps. Some smaller European banks and hedge funds have also used currency derivatives as a source of short-term liquidity.
The US dollar retained its place as the most popular currency and was on one side of 88% of all transactions that took place in April, unchanged over the past decade.
The dollar has hit 20-year highs this year as rising global interest rates and recession fears prompt investors to seek refuge in its relative safety. The rising dollar has increased pressure on countries that have dollar-denominated foreign debt and pay import prices in the stronger US currency.