THE UK FOREIGN EXCHANGE MARKET AND OVER-THE-COUNTER DERIVATIVES MARKETS IN APRIL 2004 RESULTS SUMMARY FOREIGN EXCHANGE Total

l Turnover Average daily net turnover during April 2004 was $222 billion in the spot market and $531 billion in the forward market (of which 81% were foreign exchange swap transactions). Total turnover, spot plus forward, averaged $753 billion per day, which is 49% higher than the $504 billion per day recorded in April 2001, or a rise of 30% at constant 2004 exchange rates1. This rise in volume is in contrast to the 21% fall seen between the April 1998 and April 2001 surveys.

Chart 1: Foreign Exchange Turnover at Constant and Non-constant Exchange Rates

Net average daily turnover in notional amounts
800

US$ billions

Turnover at constant 2004 exchange rates Turnover at nonconstant exchange rates

600 400 200 0

1992

1995

1998

2001

2004

Electronic platforms2 55% of foreign exchange business was conducted via electronic platforms. A higher proportion (76%) of spot business was via electronic platforms compared with forward and swap (46%), and the majority of electronic spot trades were via automated order-matching systems. Instruments Outright forward business increased from $53 billion per day in April 2001 to $103 billion per day in April 2004, and now comprises 14% of total foreign exchange turnover (up from 11% in April 2001). Foreign exchange swaps remain the most common transaction type, comprising 57% of total foreign exchange turnover (compared to 60% in April 2001).

The US dollar is used as the numeraire for the survey, so changes in the value of the US dollar against other currencies will affect the level of turnover recorded (e.g. the same amount of turnover in euros would equate to a higher US dollar value in 2004 than in 2001 as the US dollar has depreciated against the euro over this period). 2 Electronic platforms consist of automated order-matching systems (e.g. EBS, Reuters), other inter-dealer systems, multi-bank dealing systems (e.g. FXAll, Curranex) and single bank proprietary platforms.

Chart 2: Foreign Exchange Turnover by Instrument

Net average daily turnover in notional amounts
spot outright forward swap

800 600 400 200 0

US$ billions

1992

1995

1998

2001

2004

Counterparties Turnover between reporting dealers has grown by 49%, since April 2001, to an average of $507 billion per day. Customer business increased similarly, by 51%, and as such turnover between reporting dealers still accounts for around two-thirds of total turnover, in line with the 2001 survey. Turnover attributable to non-financial institutions more than doubled, and now accounts for 8% of total turnover compared with 5% in 2001. The share of turnover attributable to other financial institutions2 has decreased (25%, down from 28%). Where other financial institutions deal through prime brokers who themselves are reporting dealers, the trade would be identified in the survey by the prime institution (a reporting dealer) but not by the ultimate counterparty. Currency composition US dollar/euro remained the most traded currency pair, with 33% of total foreign exchange turnover compared to 34% in 2001. The level of trading in US dollar/yen decreased as a proportion of total turnover, while the proportion in sterling/US dollar continued to increase and is now at 23%. The US dollar continues to be the dominant currency in the UK market, with 90% of all trades having one side denominated in dollars. The proportion of turnover involving sterling increased from 24% to 28%.

Market concentration Concentration in the UK foreign exchange market has remained steady since 2001. The combined market share of the ten institutions with the highest level of turnover increased from 59% to 61%, and the top twentys share from 79% to 80%. The number of firms accounting for more than 1% of total turnover has increased from 21 in 2001 to 25 in 2004, which could be evidence of diversification or because there were fewer reporting dealers in 2004 than previously.

Financial institutions who are not reporting dealers for the purposes of the survey.

Foreign-owned institutions operating in the UK accounted for 72% of total UK turnover, compared with 81% in 2001. North American3 principals remain the most active, with a 50% share of the UK market, followed by non-UK European Union (EU) principals with a 13% share. This represents a rise of 4% in the market share of North American institutions and a fall of 8% in the market share of non-UK EU institutions. OTC DERIVATIVES Total turnover In the UK, average daily turnover in OTC currency and interest rate derivatives continued to increase. In April 2004, turnover was $643 billion compared with $275 billion in April 2001. Within this, turnover in the OTC interest rate derivatives market grew from $238 billion to $563 billion, while turnover in the OTC currency derivatives market increased from $37 billion to $80 billion. Instruments There was strong growth over all OTC currency and interest rate derivative instruments but this was most evident in the options market. Turnover in currency options grew by 94% to $64 billion per day, and interest rate options turnover increased from $13 billion to $94 billion. Interest rate options now account for 15% of the OTC derivatives market, compared with 5% in 2001. Interest rate swaps remain the instrument with the highest proportion of OTC derivatives turnover in the survey, but this share has fallen from 52% to 47% since 2001.

Chart 3: Turnover in OTC Derivatives by Instrument

Net average daily turnover in notional amounts
Interest Rate Options Interest Rate Swaps Interest Rate FRAs Currency Swaps Currency Options

800 US$ billions 600 400 200 0

1995

1998

2001

2004

Currency composition The dollar remains the most traded currency in the OTC currency derivatives market. 78% of turnover involved the dollar, down from 81% in 2001. The proportion of turnover involving the euro

US and Canadian owned.

has increased slightly to 49%, as has the proportion involving sterling (16%), but the proportion involving the yen has fallen (to 29% from 39% in 2001), reflecting a decrease in dollar/yen trading. The euro is the dominant currency in the OTC interest rate derivatives market, accounting for 58% of total turnover (from 48% in 2001), and is now at the same level as the combined European legacy currencies were in 1998. The proportions of OTC interest rate derivatives turnover attributable to the US dollar and sterling decreased, to 21% and 14% respectively. Counterparties In OTC interest rate derivatives there was a substantial increase in the proportion of the market accounted for by customer business, from 19% to 42%, driven by an increase in business with other financial institutions. In the OTC currency derivatives market the effect was less pronounced; customer business now represents 38% of turnover compared to 32% in 2001. Cross-border trades account for around two-thirds of the OTC currency and interest rate derivatives turnover, a similar proportion as in 2001. Market concentration The derivatives market results show that concentration in London has increased since 1998. The proportion of total turnover reported by the ten institutions with the highest volumes rose from 74% to 79% and by the top twenty from 89% to 94%. The OTC currency derivatives market appears to be more concentrated than the OTC interest rate derivatives market: of the 93 participants, fewer were undertaking business in the OTC currency derivatives market (56) than in the OTC interest rate derivatives markets (72) during April 2004.

Tables showing the results in more detail are attached, in similar format to the global tables released by the BIS. Also following are definitions of the different instruments covered by the survey.

Table 1 UK foreign exchange market turnover1

Daily averages in April in billions of US dollars
Instrument Spot transactions Outright forwards Foreign exchange swaps Total traditional turnover Turnover at April 2004 exchange rates
1

1995 186 33 244 464 434

1998 217 48 372 637 676

2001 151 53 300 504 577

2004 222 103 428 753 753

Adjusted for local double-counting. 2 Each leg of a foreign currency transaction other than the US dollar leg has been converted into original currency amounts at average current April exchange rates and then reconverted into US dollar amounts at average April 2001 exchange rates.

Table 2 Reported UK foreign exchange market turnover by instrument, counterparty and maturity1
Daily averages in April in billions of US dollars Instrument/counterparty Spot ........................................................ With reporting dealers ................................ Local ............................................... Cross-border ................................... With other financial institutions................... Local ............................................... Cross-border ................................... With non-financial customers ..................... Local ............................................... Cross-border ................................... Outright forwards..................................... With reporting dealers ................................ Local ............................................... Cross-border ................................... With other financial institutions................... Local ............................................... Cross-border ................................... With non-financial customers ..................... Local ............................................... Cross-border ................................... Foreign exchange swaps ........................ With reporting dealers ................................ Local ............................................... Cross-border ................................... With other financial institutions................... Local ............................................... Cross-border ................................... With non-financial customers ..................... Local ............................................... Cross-border ................................... Total ........................................................ 1995 186 146 48 98 30 16 14 11 5 6 34 17 6 11 13 10 3 5 2 3 243 187 54 133 42 22 20 14 8 6 464 1998 217 180 61 119 23 14 9 14 5 9 48 31 10 21 10 6 4 6 3 3 372 319 90 229 27 17 10 26 11 15 637 2001 151 107 27 80 37 16 21 7 3 5 53 31 8 23 16 9 8 6 2 3 300 203 51 152 85 45 40 12 6 6 504 2004 222 146 35 111 59 14 45 17 7 10 103 60 11 49 28 12 16 15 8 7 428 301 99 202 102 41 61 25 11 14 753

Maturity of forwards & swaps Up to 7 days ............................................... Over 7 days and up to 1 year ..................... Over 1 year ................................................
1 Adjusted for local double-counting.

72% 28% 0.01%

78% 21% 0.01%

69% 30% 0.01%

72% 27% 1%

Table 3 Currency distribution of reported UK foreign exchange market turnover1

Percentage shares of average daily turnover in April
Currency 1995 1998 2001 2004

US dollar ................................................ Euro ...................................................... Deutsche mark....................................... French franc........................................... ECU and other EMS currencies ............. Pound sterling ........................................ Japanese yen......................................... Swiss franc............................................. Canadian dollar...................................... Australian dollar ..................................... Other currencies .................................... All currencies .......................................
1

84 . 36 9 11 16 20 7 2 2 13 200

88 . 32 5 21 18 14 7 3 2 10 200

92 41 . . . 24 17 6 4 3 13 200

90 42 . . . 28 15 6 3 4 12 200

Because two currencies are involved in each transaction, the sum of the percentage shares of individual currencies totals The figures relate to reported net-gross turnover, i.e. they are adjusted for local

200 instead of 100 percent. double-counting.

Table 4 Reported UK foreign exchange turnover by currency pairs1

Daily averages in April in billions of US dollars and percentage shares
1995 Currency pair Amount USD/EUR USD/DEM USD/OthEMS USD/GBP USD/JPY USD/CHF USD/CAD USD/AUD USD/Other EUR/GBP EUR/JPY EUR/CHF DEM/GBP DEM/JPY DEM/CHF DEM/OthEMS Other currency pairs All currency pairs 464 100 637 100 504 100 753 100 15 3 24 4 9 2 23 3 . 100 93 53 79 25 11 8 19 . . . 15 10 6 29 % share Amount % share Amount % share Amount % share . 22 20 11 17 5 2 2 4 . . . 3 2 1 6 . 138 143 89 80 36 16 13 43 . . . 20 10 7 18 . 22 22 14 13 6 2 2 7 . . . 3 2 1 3 170 . . 102 74 24 18 16 57 17 12 4 . . . . 34 . . 20 15 5 4 3 11 3 2 1 . . . . 250 . . 174 88 30 22 27 83 26 19 11 . . . . 33 . . 23 12 4 3 4 11 3 3 1 . . . . 1998 2001 2004

1 Adjusted for local double-counting.

Table 5 UK OTC derivatives market turnover by instrument1

Daily averages daily turnover in April in billions of US dollars; notional amounts
Instrument A. Foreign exchange instruments Currency swaps. Options B. Interest rate instruments...... FRAs Swaps. Options... C. Total... Memorandum items: Turnover at April 2004 exchange rates3
1 Adjusted for local double-counting. 2 Single-currency interest rate contracts only. 3 Each leg of a foreign currency transaction other than the US dollar leg has been converted into original currency amounts at average current April exchange rates and then reconverted into US dollar amounts at average April 2001 exchange rates. This was not possible for 1995 due to a lack of sufficiently detailed data.

1995 14 1 13 56 33 18 5 70

1998 48 5 43 123 42 69 12 171

2001 37 4 33 238 83 142 13 275

2004 80 16 64 563 170 299 94 643

186

352

643

Table 6 Reported UK OTC interest rate derivatives1 turnover by currency

Daily averages in April in billions of US dollars
Currency FRAs ............................................... US dollar ......................................... Euro................................................. Japanese Yen.................................. Pound Sterling ................................. Other ............................................... Swaps US dollar ......................................... Euro................................................. Japanese Yen.................................. Pound Sterling ................................. Other ............................................... Options US dollar ......................................... Euro................................................. Japanese Yen.................................. Pound Sterling ................................. Other ............................................... Total US dollar ......................................... Euro................................................. Japanese Yen.................................. Pound Sterling ................................. Other ...............................................
1

2001 83 25 34 3 13 8 142 35 71 4 25 7 13 2 9 0 1 0 237 62 113 7 40 15

2004 170 28 104 0 24 14 299 58 168 11 48 14 94 31 53 2 6 2 563 117 325 13 78 30

Adjusted for local double-counting. Single-currency interest rate contracts only.

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Table 7 UK OTC derivatives turnover by counterparty

Daily averages in April in billions of US dollars
Total Counterparty 2001 With reporting dealers........... Local................................ Cross-border ................... With other financial institutions .......................... Local................................ Cross-border ................... With non-financial customers .......................... Local................................ Cross-border ................... Total .....................................
1

Foreign exchange 2004 379 95 284 2001 25 6 19

1

Interest rates2

2004 50 17 33

2001 192 59 134

2004 329 78 251

217 65 153

45 27 19

233 109 124

6 2 4

23 7 16

39 25 15

210 102 108

12 3 9 274
2

31 10 21 643

6 1 5 37

7 1 6 80
3

6 2 4 238

24 9 15 563

Currency swaps, options and other products.

Single-currency contracts only.

Adjusted for local double-

counting.

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INSTRUMENT DEFINITIONS AND CATEGORISATION Details of turnover in the following instruments were collected: Foreign Exchange Transactions Spot Transaction Single outright transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery (cash settlement) within two business days. The spot legs of swaps and swaps that were for settlement within two days (i.e. tomorrow/next day swap transactions) were excluded from this category. Outright Forward Transaction involving the exchange of two currencies at a rate agreed on the date of the contract for value or delivery (cash settlement) at some time in the future (more than two business days later). Also included in this category were forward foreign exchange agreement transactions (FXA), nondeliverable forwards, and other forward contracts for differences. Foreign Exchange Swap Transaction which involves the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed at the time of the conclusion of the contract (the short leg), and a reverse exchange of the same two currencies at a date further in the future at a rate (generally different from the rate applied to the short leg) agreed at the time of the conclusion of the contract (the long leg). Short-term swaps carried out as tomorrow/next day transactions are included in this category. OTC Currency Derivatives Currency Swap Transaction which involves the actual exchange of two currencies on a specific date at a rate agreed at the time of the conclusion of the contract and an agreement to exchange streams of interest payments in the currencies for an agreed period of time, followed by a reverse exchange at a pre-agreed exchange rate at maturity. Currency Option Option contract that gives the right to buy or sell a currency with another currency at a specified exchange rate during a specified period. This category also includes currency swaptions, currency warrants and exotic foreign exchange options such as average rate options and barrier options.

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Single-Currency OTC Interest Rate Derivatives Interest rate contracts are contracts related to an interest-bearing financial instrument whose cash flows are determined by referencing interest rates or another interest rate contract (e.g. an option on a futures contract to purchase a Treasury bill). This category is limited to those deals where all the legs are exposed to only one currency's interest rate. Thus it excludes contracts involving the exchange of one or more foreign currencies (e.g. crosscurrency swaps and currency options) and other contracts whose predominant risk characteristic is foreign exchange risk. Forward Rate Agreement (FRA) Interest rate forward contract in which the rate to be paid or received on a specific obligation for a set period of time, beginning at some time in the future, is determined at contract initiation. Interest Rate Swap Agreement to exchange periodic payments related to interest rates on a single currency. Can be fixed for floating, or floating for floating based on different indices. This category includes those swaps whose notional principal is amortised according to a fixed schedule independent of interest rates. Interest Rate Option Option contract that gives the right to pay or receive a specific interest rate on a predetermined principal for a set period of time. Included in this category are interest rate caps, floors, collars, corridors, swaptions and warrants.

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