LONDON (Reuters) – Non-bank financial institutions such as insurance companies, mutual funds and pension funds account for more than 50% of daily turnover in the foreign exchange market, an investigation revealed on Thursday on the foreign exchange market.
Their market share reflects a 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 large pension funds and insurance companies increased their hedging needs to protect themselves from strong currency fluctuations during the period 2013-2016. This period saw the Bank of Japan and the European Central Bank embark on massive bond buying programs as the Federal Reserve began to tighten policy.
Derivatives are a key tool for asset owners, as they often provide a profitable hedge against large currency fluctuations, which helps reduce costs and in most cases limit downside risks.
Average daily currency swap revenue with institutional investors as counterparties was $ 278 billion in April 2016, an increase of 79% from the 2013 survey, according to the survey. of the BIS.
The rise in the trading share of financial institutions contrasts with the decline of hedge funds and proprietary trading companies. Stricter regulatory rules have led to a decline in trade in accessories, especially by banks which have significantly reduced trade in currencies on their own.
Average daily cash turnover with hedge funds and proprietary trading firms as counterparties was $ 200 billion in April 2016, down 29% from the 2013 survey. Trading in forward contracts and currency swaps also declined, by 29% and 37% respectively.
In recent years, one of the main drivers of forex market growth has been the proliferation of prime brokers, hedge funds and high frequency traders. But hedge funds have suffered in the past as big banks have retreated from the blue chip brokerage space, leaving the forex markets often at the mercy of algorithmic traders.
“It is also important to note that one of the biggest game changes of recent years has been the increase in non-bank market makers in the forex market, dramatically altering the structure of the market as we know it.” said Dan Marcus, CEO of ParFX, an electronic trading platform.
At the same time, the share of interbank trade also increased for the first time since 1995, according to the survey. Banks often trade on behalf of clients such as corporations and tend to trade actively through electronic platforms, such as EBS or Reuters trading facilities.
Editing by Catherine Evans