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London’s position as the global hub for foreign currency and derivatives trading has eroded as the UK capital faces fierce competition from other major financial centres.
The triennial survey by the Bank for International Settlements published on Thursday found that while the UK remains the most important hub for currencies and interest rate derivatives trading, its share of both markets has fallen since the last survey in 2019.
London claimed 38 per cent of global turnover for foreign exchange trading in April 2022, a 5 percentage point drop since 2019, when its share was 43 per cent. In over-the-counter derivatives markets, its share slipped to 46 per cent, down from 51 per cent three years ago.
The decline comes as London continues to grapple with the financial fallout after Brexit. The UK government plans further deregulation in the City to maintain its appeal to international investors.
The study from the BIS, which is known as the central banks’ bank, is the most reliable indicator of market activity in the over-the-counter markets, where deals are often negotiated privately.
It showed the average volume of foreign exchange trades grew to a record $7.5tn per day in 2022, 14 per cent higher than 2019.
BIS said the growth may have been in part due to volatile market conditions in April, when the survey was conducted, because there were strong trade inventory imbalances. That meant banks needed “to more frequently offload them in the interdealer market”.
The interdealer market, where brokers facilitate trades between banks and other financial institutions, accounted for 40 per cent of the spot market and 54 per cent of derivatives markets. London’s share largely went to the US and Singapore. The BIS data are based on where sales are initiated or electronically traded.
Trading of over the counter derivatives slumped 19 per cent globally compared to 2019, to $5.2tn a day, largely because the swaps market had begun to shift away from the tarnished Libor lending rate. Traders had little use for forward rate agreements, which they use to manage their exposures to movements in Libor rates. The turnover of FRAs plunged 74 per cent to $500bn.
That hit the market share of both London and the US, as business rose in Asia. “Turnover in euro swaps has shifted from the UK to the euro area,” it added.
Foreign exchange swaps traded in London have boomed over recent years as investors have turned to dollar assets, hedging their exposure with swaps. Some smaller European banks and hedge funds have also used currency derivatives as a source of short-term liquidity.
The US dollar retained its spot as the most popular currency and was on one side of 88 per cent of all trades that took place in April, unchanged over the past decade.
The dollar has surged to 20-year highs this year as rising global interest rates and recession fears prompt investors to seek haven in its relative safety. The dollar’s upward climb has added pressure to countries that have dollar-denominated foreign debt and pay import prices in the stronger US currency.
