The foreign exchange and over-the-counter interest rate derivatives market in Ireland – Results of the BIS Triennial Survey 2019

The Central Bank of Ireland participated in the most recent survey of global turnover in foreign exchange (FX) and over-the-counter (OTC) single-currency interest rate derivatives that the Bank of International Settlements (BIS) coordinates every three years. The survey is a key source of information on the size and structure of global FX and OTC interest rate derivatives markets. Ireland has participated since 1995, collecting comprehensive information on the activities of credit institutions’ derivatives sales desks that are resident in Ireland. Given the international character of derivatives markets, such information is of interest from a supervisory perspective and can provide additional information about external financial stability risks facing the Irish economy through the lens of financial market activity. The 2019 survey results for Ireland show a substantial increase in FX and OTC interest rate derivatives trading during the last three years. The Irish trading volumes recovered from the downward trend recorded in the previous two surveys, and the growth rate of Irish derivatives turnover between 2016 and 2019 outpaced the global growth rate. As this article will show, the main factor behind the strong Irish growth was that large global derivatives dealers opened or reactivated derivatives sales desks in Ireland as part of their overall business strategy and in preparation for Brexit. Other driving factors also contributed to the strong growth between 2016 and 2019. For example, the rise in electronic and automated trading facilitated the growth of trading both in foreign exchange and in over-the-counter interest rate derivatives markets, and increased the participation of non-bank dealers in both markets. The growth in the FX market was mainly driven by an increase in FX swaps, used for hedging foreign exchange risks and managing funding liquidity, in an environment of increasing economic uncertainties and excess liquidity in the euro area. The growth in US dollar and euro trading outpaced the growth in pound sterling. OTC interest rate derivatives markets additionally benefited from structural developments like clearing and compression, and from changing expectations about US short-term interest rates that incentivised hedging and speculation activities.