Over the weekend, the BIS released its latest quarterly review of financial organizations, which despite being chock full of assorted data, merely summarizes what banks already report to the public and to various regulators. As such, it completely avoids the potentially black swan areas, such as derivative, off-balance sheet and shadow banking exposure. In other words, it is largely a waste of time. One section, however, that is useful,is the analysis by Morten Bech on "FX volume during the financial crisis and now" which has created a constant time series to evaluate FX trading volumes all the way through October 2011, as opposed to the traditional BIS Triennial survey, the next of which is due in April 2013. Morten's finding: "I estimate that in October 2011 daily average turnover was roughly $4.7 trillion based on the latest round of FX committee surveys."
"Moreover, I find that FX activity may have reached $5 trillion per day prior to that month but is likely to have fallen considerably into early 2012. Furthermore, I show that FX activity continued to grow during the first year of the financial crisis that erupted in mid-2007, reaching a peak of just below $4.5 trillion a day in September 2008. However, in the aftermath of the Lehman Brothers bankruptcy, activity fell substantially, to almost as low as $3 trillion a day in April 2009, and it did not return to its previous peak until the beginning of 2011. Thus, the drop coincided with the precipitous fall worldwide in financial and economic activity in late 2008 and early 2009." $4.7 trillion a day - surely a whopper of a number, but the fact that it is declining is merely the latest confirmation that having departed equity markets, and pushing liquidity in fixed income to period lows, investors and speculators are now vacating this last bastion of levered trading, courtesy of central banks having taken over not only bonds and stocks, but now Mrs. Watanabe's favorite market as well.
Here is how the BIS defines the various foreign exchange instruments:
FX volume surveys report turnover by instrument. Instrument types include the following:
Spot transactions are single outright transactions that involve the exchange of two currencies at a rate agreed to on the date of the contract for value or delivery within typically two business days.
Outright forwards involve the exchange of two currencies at a rate agreed to on the date of the contract for value or delivery at some time in the future. This category also includes forward foreign exchange agreement (FXA) transactions, non-deliverable forwards (NDFs) and other forward contracts for differences.
Foreign exchange swaps involve the exchange of two currencies on a specific date at a rate agreed to at the time of the conclusion of the contract, and a reverse exchange of the same two currencies on a future date at a rate agreed to at the time of the contract. For measurement purposes, only the long leg of the swap is reported, so that each transaction is recorded only once.
Currency swaps involve the exchange of fixed or floating interest payments in two different currencies over the lifetime of the contract. Equal principal based on the initial spot rate is typically exchanged at the beginning and close of the contract.
Currency or foreign exchange options are contracts that give the right to buy or sell a currency with another currency at a specified exchange rate during or at the end of a specified time period.