Insurance companies and pension funds dominate currency trading: BIS

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LONDON (Reuters) – Non-banking financial institutions such as insurance companies, mutual funds and pension funds account for more than 50% of daily turnover in the foreign exchange market, a survey showed on Thursday on the foreign exchange market.

Arrangement of various world currencies, including Chinese yuan, US dollar, euro, British pound, in this illustration taken January 25, 2011. REUTERS/Kacper Pempel/Illustration/File Photo

Their market share reflects growing demand for hedging through currency swaps, the Bank for International Settlements’ triennial survey showed.

This confirmed anecdotal evidence and trends from other surveys that major pension funds and insurance companies raised their hedging requirements to protect against large currency swings during the 2013-2016 period. This period saw the Bank of Japan and the European Central Bank embark on massive bond-buying programs while the Federal Reserve began to tighten policy.

Derivatives are a key tool for asset holders, as they often provide a cost-effective hedge against sharp currency movements, driving down costs and, in most cases, limiting downside risk.

The average daily turnover of foreign exchange exchanges with institutional investors as counterparty reached $278 billion in April 2016, an increase of 79% compared to the 2013 survey, according to the survey of the BIS.

PROP TRADERS ARE AFFECTED

The increase in the share of financial institutions in trading contrasts with a decline for hedge funds and proprietary trading firms. Stricter regulatory rules have led to a decline in collateral trading, particularly by banks which have drastically reduced foreign exchange trading for their own account.

Average daily cash turnover with hedge funds and proprietary trading firms as counterparty was $200 billion in April 2016, down 29% from the 2013 survey. Trading in forward contracts and foreign exchange swaps also fell, by 29% and 37%, respectively.

In recent years, one of the main drivers of growth in the forex market has been the proliferation of prime brokers, hedge funds and high-frequency traders. But hedge funds have suffered in the past as big banks retreated from the prime brokerage space, leaving forex markets often at the mercy of algorithmic traders.

“It’s also important to note that one of the biggest game changers of recent years has been the increase in the number of non-bank market makers in the forex market, dramatically changing the structure of the market as we know it. know,” said Dan Marcus, CEO of ParFX, an electronic trading platform.

At the same time, the share of exchanges between banks also increased for the first time since 1995, according to the survey. Banks often trade on behalf of clients such as corporates and tend to actively trade through electronic platforms, such as EBS or Reuters trading facilities.

Editing by Catherine Evans

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