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Currency trading slumps globally as swaps, forwards fall out of favor

Global activity in the foreign-exchange market is on the decline as traders step away from forward and swap transactions.

Average daily foreign-exchange turnover in the U.K. dropped to $2.6 trillion in October, a 4% fall from the record high of $2.7 trillion in April, according to data released Tuesday by the Bank of England. In North America, daily volume dropped 0.1% to $995 billion in October from a year earlier, a report from the Federal Reserve Bank of New York showed. Tokyo and Australia also reported declining volumes.

The slump was led by a slide in forwards and swaps, which fell 5.6% and 14.3%, respectively, from a year earlier in U.S. markets. The dollar's surprising surge last year might have contributed to those instruments falling out of favor, said Olivier Doleires, head of currencies at UBP's investment management division. For money managers based outside the U.S., a rising greenback would boost returns on unhedged dollar-denominated holdings.

"The direction south of other asset classes, mainly equity, fixed income and credit, might have contributed to the decline in FX swap trading," said Mr. Doleires, who is based in Geneva. "Lots of flows went to dollar assets on an unhedged basis."

An uptick in other instruments wasn't enough to make up the shortfall. Spot market transactions increased 10.6% from the previous year, according to the New York Fed, while usage of options grew by 32.9%.

The most recent data from the Bank for International Settlements, from a triennial survey released in 2016, pegged daily global currency-market turnover at $5.1 trillion. That level marked a drop from $5.4 trillion three years earlier.

MiFID effect

Driving the divergence in activity could be the implementation of MiFID II, according to MarketFactory, whose software helps traders aggregate currency prices and manage risks from buying and selling on multiple venues.

"Forwards are not as transparent as spot," said Executive Chairman and co-founder James Sinclair, who is also a member of the Foreign Exchange Committee. "Under MiFID II, you have to take all sufficient means necessary to give customers the best results. The tools available to do that are most available in the spot market, rather than forwards."

One other notable shift was that while euro-dollar remained the most-traded pair in London, the euro-sterling cross has become less busy than dollar-yuan. Average daily turnover in the U.S.-China pair climbed to a record $72.9 billion from $62.2 billion in April, replacing euro-pound as the seventh most-traded currency pair, according to BOE data.