In April 2004 the Ufficio Italiano dei Cambi participated in the customary triennial survey of the volume of foreign exchange and derivatives market transactions carried out by major resident banks. The survey was conducted simultaneously by 52 central banks and monetary authorities, co-ordinated by the Bank for International Settlements, which releases the preliminary global results, after adjusting for cross-border double-counting.
The Italian survey was conducted on a sample of 46 banks (43 Italian banks and 3 branches of foreign banks in Italy). Their shares of the foreign exchange and derivatives markets are estimated at 92 and 84 per cent respectively, whereas the sample of the 2001 survey accounted for 80 per cent in both markets. Data are computed on a daily basis and are adjusted for local double-counting.
In April 2004 the total gross volume of foreign exchange transactions by the banking system, obtained by expanding the sample data, amounted to $481 billion, or $456 billion after adjusting for local double-counting (compared with $416 billion and $403 billion in 2001). On an average daily basis (21 trading days in April 2004) turnover adjusted for local double-counting is estimated to have been $22 billion ($21 billion in 2001). Counting both foreign exchange transactions and derivatives transactions, gross volume amounted to $1,609 billion, or $1,490 billion after adjusting for local double-counting (against $1,024 billion and $981 billion in 2001). Average daily turnover amounted to $71 billion ($52 billion in 2001).
The results of the 2004 survey confirm the change in the structure of the over-the-counter (OTC) market that emerged in the 2001 survey. Interest rate products, which for the first time in 2001 exceeded foreign exchange instruments in volume terms, continued to be the largest component of the OTC market. The proportion of trading with bank counterparties, mainly international, increased sharply, especially in the interest rate segment, while it declined in favour of other financial entities in the foreign exchange segment.
The contribution of the traditional foreign exchange market contracted further to 33 per cent, after the drop in 2001 from 86 to 41 per cent, despite the increase of the spot segment where volume doubled. The forward segment rose slightly while its share of the total fell to 57 per cent. In the derivatives market, the contribution of turnover in foreign exchange derivatives to total turnover rose to 8 per cent, owing to the increase in the volume of options.
Together with the modest expansion in the foreign exchange market, a pronounced increase was recorded in the market in interest rate derivatives in both absolute and relative terms. The volume of interest rate derivatives rose from around $563 billion to $ 947 billion, but their share of the derivatives markets fell from 97 to 92 per cent, owing to the increase in the importance of foreign exchange derivatives.
Swaps remained the most widespread type of instrument, accounting for a predominant share of volume in both the forward exchange market (67 per cent) and the interest rate market (73 per cent). Whereas in the foreign exchange market the volume of outright forwards doubled in absolute terms, in the interest rate market the share of forward rate agreements fell to 21 per cent. The volume of currency options rose to almost twice that of interest rate options and the shares of the two instruments in their respective markets amounted to 22 and 6 per cent.
As in the foreign exchange market, business in the derivatives market was marked by a high proportion of interbank transactions (90 per cent); the activity was mainly carried out with foreign counterparties (86 per cent), almost all of them banks. The share of resident banks increased in both the foreign exchange market (to 6 per cent) and the interest rate market (to 9 per cent), while that of other financial institutions rose in the foreign exchange market (to 27 per cent) and declined sharply in the interest rate segment (to 11 per cent). Unlike international transactions, domestic activity was concentrated with customers. The contribution of resident customers to foreign exchange turnover dropped to 6 per cent, while their contribution to interest rate turnover remained around 1 per cent.
Transactions denominated in euro prevailed in both the foreign exchange market and the derivatives market, accounting for around 78 per cent (84 per cent in 2001) of total turnover. With regard to the distribution by currency, the dollar continued to play the dominant role in both the spot market and the forward market. 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 81 per cent of total transactions against euro (52 per cent excluding the spot market). With regard to foreign currency against foreign currency transactions, the currency pair dollar/pound (35 per cent) was the most heavily traded, followed by the pair dollar/yen (30 per cent) and the pair dollar/Swiss franc (13 per cent), the two latter both with a downward trend. In the interest rate market, contracts referring to the euro were dominant, with volume six times that of contracts referring to the dollar.