The Triennial BIS Survey – USD Derivatives

Every three years I eagerly await the BIS Triennial Survey as it rarely fails to surprise. The 2022 Survey was announced in October 2022 and I have been remiss in not looking into the details of the data.

Hidden in the tables are many interesting facts which correct the market thinking on the state of the FX and derivatives markets, the trends over many years and potentially what to look forward to in the future.

This paper is the first of a series on the 2022 Survey and looks at looks at USD derivatives as was a comparison across the 2010 to 2022 Surveys. I will look more carefully at the 2022 Survey for USD next blog but this will start the process of a longer series on the derivatives markets.

I plan to look at the top 4 currencies (USD, EUR, GBP and AUD) as well as the total market over the next papers.

The USD derivatives market has seen strong growth in average daily turnover (blue line) since the 2007 (i.e., the 2010 Survey which uses data from 2007 – 2010). In fact, the turnover has increased by over 7 times from around 300,000 million to 2,200,000 million per day.

While this is impressive growth, it has not been equal for all market participants.

• The Reporting Dealers (orange) have had a moderate decrease in the percentage of the total from 33% to 17% now.

• The Other Financials (grey) have increased their share from 54% to 80%.

• The Non-Financials (yellow) were never a major component of the turnover but have decreased from a high of 20% in 2013 to around 1% now.

The growth story - Other financials

The growth story (I think unsurprisingly) is the Other Financials, i.e., those who are non-reporting financial firms and typically non-banks.

This group dominates the market with around 80% share of both LIBOR and SOFR markets in the 2022 Survey as shown in the following chart.

This group has grown with the SOFR and LIBOR markets and has largely crowded out other market participant and now represents around 80% of market turnover.

Since 2010, the Other Financials have been well over 50% of the market and have represented the largest group in all the Surveys since 2010. Note that the separate reporting of SOFR started in 2019 and this group has been just as active in SOFR as in LIBOR.

Falling involvement - non-financials

If I then look at the Non-Financials only and compare the percentages of the LIBOR and SOFR markets, the decline of market share for this group is clear in the following chart.

In the Surveys prior to 2019 (when SOFR swaps derivatives were not separately reported), the Non-Financials were not major participants in derivatives. Since 2016, the share of the total (LIBOR and SOFR) has declined.

Since 2019, the share of both LIBOR and SOFR has declined similarly. The Non-Financials appear to be a very small component of the overall derivatives markets in USD.

What could be causing the fall in the Non-Financial percentage?

While it is not clear what caused this decline in percentage, one thought was the interest rate environment.

The following chart shows the Non-Financial percentage and the USD 3-month LIBOR and the USD 5-year LIBOR swap rates. This is to ‘test’ whether the percentage is impacted by the direct or outright short term (LIBOR) or longer-term (5-year swap) rates.

There is no obvious connection between the direction or level of LIBOR/5-tear swap and the percentage for Non-Financials. While the percentage did rise from 2010 to 2016 which corresponded with the fall in interest rates, this was not repeated in the 2019 – 2022 falls in interest rates.

The actual turnover for Non-Financials have been falling as well as the percentage (see the first chart).

Something is happening over the most recent Surveys which indicates the Non-Financials are a relatively small component of the USD derivatives market.

Summary

The trends in the USD derivatives markets can be observed over many years using the BIS Triennial Surveys.

Since the 2010 Survey:

• The Other Financials have continued to dominate the USD derivatives market turnover and now represent approximately 80% of the market.

• The Reporting Dealers are a declining percentage of the market and now represent approximately 19% of the turnover.

• The Non-Financials are showing a multi-year decline in percentage and are now around 1% of the market.

As the USD market transitions to SOFR in its various forms (Term SOFR, compounded and averages) the main users will adopt a standard form of SOFR. The LIBOR reporting will disappear and be replaced by SOFR.

I expect the Other Financials to continue their dominance of the market turnover and potentially increase their share over the next 3 years.

Non-Financials are still a mystery play; will they remain at very low growth levels of turnover or will they return to the markets as rates rise and/or increase in volatility? Will they also adopt SOFR and/or Term SOFR to replace LIBOR or simply hedge in other ways?

My next blog will look further into the USD 2022 Survey for any hints as to how the USD derivatives markets may evolve in the near future.