In April 2001 the Ufficio Italiano dei Cambi conducted the customary triennial survey of the volume of foreign exchange and derivatives market transactions carried out by the major resident banks. This survey was conducted simultaneously by the central banks of 48 countries, co-ordinated by the Bank for International Settlements, which is releasing the preliminary global results, after adjusting for cross-border double-counting.
The Italian survey was conducted on a sample of 44 banks (37 Italian banks and 7 branches of foreign banks in Italy). Their share of the foreign exchange market is estimated at 80 per cent, whereas the sample of the 1998 survey accounted for 75 per cent. Data are computed on a daily basis and are adjusted for local dealers double-counting.
In April 2001 the total gross volume of foreign exchange transactions by the banking system, taking into account the coverage of the sample, amounted to $416 billion, or $403 billion after adjusting for local double-counting (compared with $789 billion in 1998). On a daily average basis (19 trading days in April 2001) the net turnover is estimated to have been $21 billion ($38 billion in 1998). Counting both foreign exchange transactions and derivatives transactions, gross volume amounted to $1,024 billion, or $981 billion after adjusting for local double-counting (against $919 billion in 1998). Average daily turnover amounted to $52 billion ($44 billion in 1998).
The results of the 2001 survey highlight a major change in the structure of the over-the-counter market. For the first time, interest rate products exceeded foreign exchange instruments in volume terms, becoming the largest component of the OTC market. The proportion of trading with bank counterparties, mainly national, declined sharply in favour of trading with other financial counterparties, especially in the interest rate segment. The pronounced contraction in the foreign exchange market was attributable to the introduction of the euro, which eliminated transactions between euro area currencies. Among other factors responsible for the drop in turnover was consolidation in the banking industry, a process which has accelerated in recent years, which mainly contributed to the decline in inter-dealer activity.
The traditional foreign exchange market, which in 1998 accounted for the bulk of transactions (86 per cent), recorded a sharp contraction, with a halving of its contribution (41 per cent) to total activity. The contraction equally involved the spot and forward segments; however, the latter's share of the total in foreign exchange has now reached 70 per cent. In the derivatives market, the contribution of turnover in foreign exchange derivatives to total turnover fell to 3 per cent, despite the increase in the volume of options in absolute terms.
In contrast with the drastic contraction in the foreign exchange market, the market in interest rate derivatives expanded in both absolute and relative terms. The volume of interest rate derivatives rose from around $114 billion to $563 billion and their share of derivatives markets from 88 to 97 per cent.
Swaps remained the most widespread type of instrument, accounting for a predominant share of volume in both the forward exchange market (93 per cent) and the interest rate market (70 per cent). Whereas in the foreign exchange market the importance of outright forwards declined, in the market in interest rates forward rate agreements consolidated their share (29 per cent). The volume of currency options doubled compared with interest rate options.
As in the foreign exchange market , business in the derivatives market was marked by a high proportion of interbank transactions (respectively 93 and 99 per cent); the activity was mainly carried out with foreign counterparties (86 per cent), almost all of them banks. The share of resident banks declined in both the foreign exchange market (3 per cent ) and the interest rate market (5 per cent), while that of other financial institutions increased, especially in the interest rate segment (respectively 15 and 39 per cent). Unlike international transactions, domestic activity was concentrated with customers. The contribution of resident customers to foreign exchange turnover remained around 10 per cent, while their contribution to interest rate turnover dropped to 1 per cent.
Transactions denominated in euro prevailed in both the foreign exchange and the derivatives markets, accounting for around 84 per cent of total turnover. With regard to the distribution by currency, the dollar continued to play the dominant role in both the spot and in the forward markets. The volume of contracts in dollars exceeded that of contracts involving any other currency by a wide margin. The currency pair euro/dollar accounted for around 78 per cent of total transactions against euro (86 per cent excluding the spot market). The currency pair dollar/yen (74 per cent) was the most heavily traded. There was an increase in the pair dollar/Swiss franc and a decrease in the pair dollar/pound. In the interest rate market, contracts referring to the euro were dominant, with volume four times that of contracts referring to the dollar.