UK loses OTC interest rate derivatives crown to US

The BIS Triennial Central Bank Survey, which looks at the size and structure of OTC derivatives markets, shows that the UK’s share of global activity in OTC interest rate derivatives trading fell to 39% from 50% between April 2013 and April 2016, as the US saw its share swell to 41% from 23%.

The weakness in euro activity proved telling for the UK – 75% of all trades in euro-denominated derivatives were executed in the UK in April 2016 – whereas the US received a boost from a jump in dollar instruments.

The average daily turnover of euro-denominated contracts fell to $ 638 billion in April 2016 from $ 1.1 trillion in April 2013, while turnover of US dollar contracts rose to $ 1.4 trillion from $ 639 billion in the same period.

Overall, daily turnover in OTC interest rate derivatives averaged $ 2.7 trillion in April 2016, BIS said, up from $ 2.3 trillion in 2013 and $ 2.1 trillion in 2010, with the increase partly the result of “more comprehensive” reporting by dealers.

“Even so, the increase between 2013 and 2016 would have been larger still, but for the depreciation of many currencies against the US dollar, which reduced the US dollar value of turnover in currencies other than the US dollar,” BIS said.

The survey also showed that large commercial and investment banks and securities houses have continued to lose ground in the OTC interest rate derivatives markets to other financial institutions, such as smaller rivals, funds, building societies and insurers. These smaller institutions increased their share of daily turnover to 66% from 59% in April 2013.

Banks have been shrinking the size of their balance sheets, cutting leverage in the wake of the financial crisis.

Despite the continued growth of the market, average daily turnover of interest rates derivatives trades between major dealer banks fell by 12% to $ 694 billion. The share of interdealer trades fell to 26% of total turnover in April 2016, from 34% three years earlier, marking a new low since the survey began in 1995.

The survey, which took place in April and collected data from close to 1,300 banks and other dealers across 52 jurisdictions, aims to increase the transparency of OTC markets and to help inform talks on reforms.

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