The foreign-exchange market proved its resilience to challengesranging from tumbling profits to a rate-fixing scandal in figurespublished once every three years by the Bank for InternationalSettlements.

Average daily trading dropped to $5.1 trillion in April, from arevised $5.4 trillion in the same month in 2013, the BIS saidThursday in its latest triennialsurvey of the currency market. If it hadn't been for thedollar's appreciation, that volume would actually have risen about4%, according to the report. The use of swaps increased, wideningits lead over spot trading, or dealing in the currencies themselvesrather than derivatives.

The size of the drop in currency trading is potentially asurprise for an industry blighted by losses from the Swiss NationalBank's shock decision to scrap its exchange-rate cap last year, aswell as accusations of price-rigging that have led to more than $10 billion in finesand penalties. While individual central banks recently reported arecovery in trading in the six months through April, thatfollowed a steady drop-off in activity since 2014.

“One of the foreign-exchange market's best qualities is itsability continuously to adapt and stay relevant in light ofchanging market and regulatory conditions,” Dan Marcus,London-based CEO of Cie. Financiere Tradition SA's ParFX platform,said before the BIS report was released.

Winning Yuan

The dollar increased its lead as the most-traded currency in thesurvey, and was on one side of 88% of deals, up a percentage pointfrom three years earlier. The euro remained at No. 2, though itsshare fell to 31%.

The big winner was the yuan, which doubled its slice of themarket to 4%. That made it the eighth most-traded currencyworldwide and saw it overtake the Mexican peso to be first inemerging markets — vindicating China's efforts to liberalize itsuse.

Spot currency trading fell 19% to $1.7 trillion a day, its firstdecline since 2001. The use of swaps, which allow an investor toborrow one currency from a counterparty while simultaneouslylending a second currency to another, climbed 6% to $2.4trillion.

“Trading activity has changed unevenly across the main FXinstrument categories,” the BIS said. “Volumes of spot trades andFX swaps, the two largest instrument categories, have evolved inopposite directions.”

The state of the currency market matters to everyone fromcentral banks to companies right across the global economy. It'sthe world's largest financial market and is vital to the smoothrunning of all others. And it's had a tumultuous time since theBIS's 2013 survey, which showed a jump in daily trades from $4trillion in 2010.

The manipulation scandal blew up shortly before the last reportwas published, and in July this year, HSBC Holdings Plc bankersbecame the first individuals charged by the U.S.

FX Concepts LLC, once the world's biggest currency hedge fund,shuttered in October 2013, and the closures picked up again afterlosses on the Swiss franc in January 2015. The franc was anothercurrency to lose market share in the latest figures, while thepound saw trading increase in April, two months before the Brexitvote.

Other unanticipated events, including the Bank of Japan adoptingnegative interest rates in January, and a slower pace of U.S.policy tightening than the Federal Reserve had predicted, are alsohurting currency traders' profits. Dealing is further hampered by aswath of regulations intended to prevent a repeat of the financialcrisis. The Parker Global Index of top currency funds' returns hasfallen in two of the past three years and is headed for anotherdecline in 2016.

Institutional investors such as insurance companies and pensionfunds further increased their activity in contrast to hedge fundsand proprietary trading companies, with their greater market sharespurred by their greater use of swaps, Basel, Switzerland-based BISsaid.

In terms of geography, the top trading centers extended theirlead over smaller locations, with sales desks in the five biggestmarkets — including the U.K., U.S. and Singapore — capturing 77% offoreign-exchange deals.

The survey shows “a continuation of the trend toward greaterconcentration of FX trading in the largest financial centers,” theBIS said.

Bloomberg News

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