Emerging FX derivatives turnover rises as investors hedge risk-BIS

LONDON Sun Dec 8, 2013 6:00am EST

LONDON Dec 8 (Reuters) - Investors seeking to cut exchange rate risk have driven a rise in the emerging currency derivatives market, with turnover increasing by 40 percent in the past three years, a BIS survey showed on Sunday.

The survey, an update on the triennial survey published by the Bank for International Settlements in September, showed over-the-counter (OTC) trading turnover in emerging currency derivatives had grown to $535 billion in 2013, compared with $380 billion in 2010.

OTC refers to trade in securities in settings other than a centralised exchange, such as via dealer networks.

According to the BIS, the figures are "consistent with the view that hedging demand and speculation by foreign portfolio investors - interested in mitigating the exchange rate risks of their local currency investments or speculating on currency movements - has grown in importance".

Emerging currencies have weakened significantly this year against the dollar, denting emerging stock and bond returns for foreign investors. The South African rand has fallen more than 18 percent while the Indian, Turkish and Brazilian currencies are down 10-12 percent.

The BIS said derivatives trading growth had been strong across the spectrum, with turnover in forwards, currency swaps and options rising faster than in developed markets. OTC trade in options, for instance, posted a 102 percent rise in the 2010-2013 period.

In contrast, turnover in spot currency trading rose by just 17 percent over the survey period.

Interest rate derivatives in emerging markets also grew in the past three years, expanding by a third, the BIS said. Average daily turnover remains small, however, at $84 billion, or 4 percent of developed markets.

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