Understanding Foreign Exchange Derivatives Using Trade … · 2019-05-08 · 9-12M 5% 12M+ 2%...
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FEATURE ARTICLE 1 HONG KONG MONETARY AUTHORITY QUARTERLY BULLETIN MARCH 2018 By Monetary Management Department Understanding Foreign Exchange Derivatives Using Trade Repository Data: The Non-deliverable Forward Market 1 Based on turnover statistics from Bank for International Settlements (BIS) (2016), Triennial Central Bank Survey – Foreign Exchange Turnover in April 2016 (www.bis.org/publ/ rpfx16fx.pdf) and internal calculations using HKTR data. 2 For more information on the data used in this article, see Box 3: Trade repositories as a data source. 1. Introduction In recent years, Hong Kong has established a regulatory framework for over-the-counter (OTC) derivatives consistent with global standards, and implemented reforms in regulatory reporting, central clearing, as well as capital and margin requirements on uncleared derivatives. These developments are in line with the G20 commitment in 2009 to enhance transparency and reduce systemic risk in the OTC derivatives market. Starting from July 2017, under the requirement of regulatory reporting, all entities supervised by the HKMA or regulated by the Securities and Futures Commission (SFC), and certain central counterparties (CCPs), have to report their OTC derivatives transactions in the five asset classes of interest rate, foreign exchange (FX), credit, equity and commodity. Among these asset classes, the mandatory reporting of interest rate swaps and FX non-deliverable forwards (NDFs) started two years earlier in July 2015. Hong Kong is a major trading centre for FX derivatives, and NDFs in particular, with an estimated 10% of global turnover of FX derivatives trading and 30% of NDF trading. 1 Similar to other FX derivatives, the NDF is a forward contract for hedging currency risk or profiting from currency volatility, albeit subject to a different settlement process that makes its use attractive for certain currencies (see Box 1 for more detail). NDFs represent an estimated 16% of the overall FX derivatives market in Hong Kong by gross notional value. This article presents a description of the NDF market as seen through the data collected in Hong Kong at the beginning of 2018, and sets out the major developments in the market over the two years of 2016–2017. The results are derived from analysis of trade-level data reported to the Hong Kong Trade Repository (HKTR). 2 In terms of market structure, the NDF market is mostly traded at very short maturities. The major non-deliverable currencies are the Taiwanese dollar, the Korean won and the renminbi. Most of the outstanding positions are held by banks and other financial entities. Over the past two years, the NDF market experienced three major changes: a marked increase in central clearing; a change in currency composition; and an increasing involvement by other financial institutions relative to banks. Box 1 NDF: What is it? The NDF is a forward contract with a different settlement process. As in a standard forward contract, two counterparties agree to buy/sell a currency at a specified future date at an agreed exchange rate. The purpose is to lock in an exchange rate for a certain period in the future. At settlement, instead of exchanging the underlying currencies, NDF counterparties settle the trade’s profit or loss in a widely traded (“deliverable”) currency, most often the US dollar. The amount settled is the difference between the exchange rate agreed in the contract and the prevailing exchange rate observed at a specified future date, multiplied by the agreed notional amount. The most prevalent non-deliverable currencies are Asian and Latin American currencies.
Transcript of Understanding Foreign Exchange Derivatives Using Trade … · 2019-05-08 · 9-12M 5% 12M+ 2%...
FEATURE ARTICLE
1 Hong Kong monETARy AUTHoRITy QUARTERLy BULLETIn mARCH 2018
By Monetary Management Department
Understanding Foreign Exchange Derivatives Using Trade Repository Data: The non-deliverable Forward market
1 BasedonturnoverstatisticsfromBankforInternationalSettlements(BIS)(2016),TriennialCentralBankSurvey–ForeignExchangeTurnoverinApril2016(www.bis.org/publ/rpfx16fx.pdf)andinternalcalculationsusingHKTRdata.
2 Formoreinformationonthedatausedinthisarticle,seeBox3:Traderepositoriesasadatasource.
1. Introduction
Inrecentyears,HongKonghasestablishedaregulatoryframeworkforover-the-counter(OTC)derivativesconsistentwithglobalstandards,andimplementedreformsinregulatoryreporting,centralclearing,aswellascapitalandmarginrequirementsonunclearedderivatives.ThesedevelopmentsareinlinewiththeG20commitmentin2009toenhancetransparencyandreducesystemicriskintheOTCderivativesmarket.
StartingfromJuly2017,undertherequirementofregulatoryreporting,allentitiessupervisedbytheHKMAorregulatedbytheSecuritiesandFuturesCommission(SFC),andcertaincentralcounterparties(CCPs),havetoreporttheirOTCderivativestransactionsinthefiveassetclassesofinterestrate,foreignexchange(FX),credit,equityandcommodity.Amongtheseassetclasses,themandatoryreportingofinterestrateswapsandFXnon-deliverableforwards(NDFs)startedtwoyearsearlierinJuly2015.
HongKongisamajortradingcentreforFXderivatives,andNDFsinparticular,withanestimated10%ofglobalturnoverofFXderivativestradingand30%ofNDFtrading.1SimilartootherFXderivatives,theNDFisaforwardcontractforhedgingcurrencyriskorprofitingfromcurrencyvolatility,albeitsubjecttoadifferentsettlementprocessthatmakesitsuseattractiveforcertaincurrencies(seeBox1formoredetail).NDFsrepresentanestimated16%oftheoverallFXderivativesmarketinHongKongbygrossnotionalvalue.
ThisarticlepresentsadescriptionoftheNDFmarketasseenthroughthedatacollectedinHongKongatthebeginningof2018,andsetsoutthemajordevelopmentsinthemarketoverthetwoyearsof2016–2017.Theresultsarederivedfromanalysisoftrade-leveldatareportedtotheHongKongTradeRepository(HKTR).2Intermsofmarketstructure,theNDFmarketismostlytradedatveryshortmaturities.Themajornon-deliverablecurrenciesaretheTaiwanesedollar,theKoreanwonandtherenminbi.Mostoftheoutstandingpositionsareheldbybanksandotherfinancialentities.Overthepasttwoyears,theNDFmarketexperiencedthreemajorchanges:amarkedincreaseincentralclearing;achangeincurrencycomposition;andanincreasinginvolvementbyotherfinancialinstitutionsrelativetobanks.
Box 1
nDF: What is it?
TheNDFisaforwardcontractwithadifferentsettlementprocess.Asinastandardforwardcontract,twocounterpartiesagreetobuy/sellacurrencyataspecifiedfuturedateatanagreedexchangerate.Thepurposeistolockinanexchangerateforacertainperiodinthefuture.Atsettlement,insteadofexchangingtheunderlyingcurrencies,NDFcounterpartiessettlethetrade’sprofitorlossinawidelytraded(“deliverable”)currency,mostoftentheUSdollar.Theamountsettledisthedifferencebetweentheexchangerateagreedinthecontractandtheprevailingexchangerateobservedataspecifiedfuturedate,multipliedbytheagreednotionalamount.Themostprevalentnon-deliverablecurrenciesareAsianandLatinAmericancurrencies.
2 Hong Kong monETARy AUTHoRITy QUARTERLy BULLETIn mARCH 2018
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2. StylisedfactsontheNDFmarket
a. SizeoftheNDFmarket
On31January2018,theHKTRcontainedtrade-levelinformationon130,993NDFoutstandingpositions.TheirgrossnotionalvaluewasUS$1,265billionafterremovingdoublecountingfromtradesreportedbybothcounterparties.
Chart1illustratesthechangeofNDFoutstandingpositionsovertime.During2016–2017,thegrossnotionalvalueofNDFoutstandingpositionsfluctuatedbetweenapeakofUS$1,503billioninMarch2016andatroughofUS$1,028billioninDecember2017(whichpointstoapotentialseasonaleffectatyearend).3FromJanuary2016toJanuary2018,theNDFgrossnotionaloutstandingwasonaverageUS$1,191billion.
CHART 1
gross notional value of nDF outstanding positions
0
500
1,000
2,000
1,500
US$ bn
Jan2016
Jul Jan2017
Jul Jan2018
Source:HKTRpositionsforpublicdisclosure.
Note:Tradesreportedbybothpartiesarecountedonlyonce.
AsHongKongisaninternationalfinancialcentre,thereportingrulesrequirethereportingoftradesbookedinHongKongaswellastrades“conductedinHongKong”(inshort,tradedinHongKong,butbookedinotherlocations).4Informationonthesetradesisimportantforunderstandingthemarketdynamics(forexampleliquidityandtheformationofprices).
Informationontradingdeskandbookinglocationofthetradesisusedtodistinguishthetwotypesoftrades.Forthepositionsoutstandingon5January2018,29%ofNDFtrades(measuredbygrossnotionaloutstanding)werebookedinHongKongand61%wereconductedinHongKong(Chart2).ThelargeshareofNDFtradesconductedinHongKongisconsistentwiththehighnumberofinternationalinstitutionsactiveinthelocalfinancialmarket.Inaddition,5%ofthegrossnotionalvalueofoutstandingpositionsintheHKTRwasreportedbyCCPs.5
CHART 2
nDF positions booked vs conducted in Hong Kong
0
20
40
60
80
100 5%
61%
29%
5%
% of gross notional
Conducted in HK Booked in HKCCP reporting Others
NDF gross notional
Source:HKTR,5January2018positions.
Note: “Others”includespositionsthatappearneitherbookednorconductedinHongKong(thuspotentiallyreportedvoluntarily).
3 Bothin2016and2017,thegrossnotionaloutstandingdroppedbyalmost20%andrecoveredthefollowingmonth.
4 TradesconductedinHongKongaretradesinwhichoneoftheindividualswhomadethedecisiontoenterintothetransactionisatraderemployedinHongKong,andwhichareconductedonbehalfof,andbookedin,anaffiliateentityofthesamegroup.Aspartofthisrequirement,entitiesreportinformationonthetradingdeskandthebookinglocationoftrades.Fordetails,seeQ20inFAQs on the Securities and Futures (OTC Derivatives Transactions – Reporting and Record Keeping Obligations) Rules,Oct.2017.
5 ThereisamismatchbetweentheshareoftradesreportedbyCCPsandthosereportedwithCCPsascounterparty,mainlybecausethereportingrequirementforCCPsappliesonlytotradeswithcounterpartiesincorporatedinHongKong.
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6 Globally,LatinAmericancurrenciesrepresentanimportantclusterofnon-deliverablecurrencies,buttheyarenotheavilytradedinHongKong,likelyduetotimezonedifferences.
7 “Unidentified”entitiesarethosethatareunabletobeclassifiedintermsofsectorofactivityandcountryofincorporation.
b. Currenciesandmaturities
Unsurprisingly,Asiancurrenciesrepresentthelion’sshareofnon-deliverablecurrenciestradedinHongKong.InJanuary2018,theTaiwanesedollarwasthemostprevalentnon-deliverablecurrency,accountingfor26%oftheoutstandinggrossnotional(Chart3).Othermajornon-deliverablecurrenciesweretheKoreanwon(25%ofgrossnotional),therenminbi(23%),theIndianrupee(15%)andtheMalaysianringgit(2%).Theremaining9%ofgrossnotionalwascomprisedofaverybroadrangeofcurrencies,includinganumberofLatinAmericancurrencies,eachaccountingforlessthan2%ofthegrossnotional.6USdollarwasthesettlementcurrencyinnearlyalloftheNDFtrades(99%ofthegrossnotional).
ThematurityofNDFtradestendstoberelativelyshort.OverthreequartersoftheNDFoutstandingtrades,measuredbygrossnotionalvalue,hadaresidualmaturityofuptothreemonths(Chart3).Maturitiesbetweenthreemonthsandoneyearaccountedforanother23%.NDFtradeswitharemainingmaturityoveroneyearaccountedforlessthan2%.
CHART 3
Currency and maturity breakdown of nDF positions
0
20
40
60
80
100%
By non-deliverable currency By residual maturity
TWD 26%
KRW 25%
CNY 23%
IND 15%
MYR 2%
Others 10%
0-3M 76%
3-6M 12%
6-9M 6%9-12M 5%
12M+ 2%
Source:HKTR,5January2018positions.
Note: Percentagesdonotsumto100duetoroundingeffects.
c. Marketparticipants
InlinewiththeOTCderivativesmarketingeneral,theNDFmarketisrelativelyconcentratedaroundthetopdealers.AsshownintheHKTRdataasat5January2018,129financialentities(whichbelongto70groups)reportedNDFtradestotheHKTR.Thetopfiveinstitutionsaccountedfor48%oftheoutstandinggrossnotionalwhilethetoptenentitiesaccountedfor64%ofthegrossnotional(Chart4).
CHART 4
market participants subject to mandatory reporting
%
0
25
50
75
100
NDF gross notional
Others:36%
Top 10entities:
64%
Top 6-10entities:
16%
Top 5entities:
48%
Source:HKTR,5January2018positions.
Note:ExcludesCCPs.
Tradecounterpartiesaresignificantlymorediverse.Asshowninthesamesetofdata,2,400distinctentities,whichbelongtoaround1,600groups,wereidentified.Chart5presentsabreakdownoftradecounterpartiesbysector.In48%ofthetrades(byoutstandinggrossnotional),bankswerethecounterparty.Thenon-bankfinancialsector(whichincludesinvestmentbanks,assetmanagers,hedgefundsandinsurers)wascounterpartyto22%oftheoutstandinggrossnotional.CCPswerecounterpartyto23%oftrades(byoutstandinggrossnotional),reflectingtheirincreasinginvolvementinprovidingcentralclearingtotheNDFmarket.Thecorporatenon-financialsectoraccountedfor2%oftheoutstandinggrossnotional,whilepublicsectorinstitutions,privateindividualsandunidentifiedentitiesaccountedfortheremaining5%.7
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CHART 5
sectoral breakdown of market participants on the counterparty side
4%
1%
2%
23%
22%
48%
0 10 20 30 40 50% of gross notional
Individual/Unidentified
Non-financial firms
Public sector
CCPs
Other financial entities
Banks
Source:HKTR,5January2018positions.
Geographically,tradecounterpartiesweredomiciledmainlyintheUKandtheUS,representing28%and19%oftheoutstandinggrossnotionalrespectively(Chart6).CounterpartiesdomiciledinHongKongmadeup10%ofthegrossnotional,whileFrancetookup7%oftheshare,andAustraliaandTaiwaneachconstituted5%.Alargenumberofothercountries,eachcontributingsmallshares,accountedfortheremainderoftheoutstandinggrossnotional.
CHART 6
geographical split of market participants on the counterparty side
UK28%
US19%
HK10%
FR7%
AU5%
TW5%
DE4%
CH4%
SG4%
JP3%
Others12%
% of gross notional
Source:HKTR,5January2018positions.
Note: ExcludesCCPs.“Other”includesUnidentifiedcounterparties,whichaccountfor5%.
d. Currencyrisktransferbyeconomicsectorofcounterparties
FXforwards,includingNDFs,havetheprimarypurposeoftransferringcurrencyriskbetweentwocounterpartiesbylockinginanexchangerateforacertainperiodinthefuture.Basedontheexchangerateprevailinginthemarketatthespecifiedfuturedate,onecounterpartywillgainaprofitandtheotherwillexperiencealoss.
MarketparticipantsentertheNDFmarketfordifferentreasons.SomemarketparticipantsuseNDFstooffload(“hedge”)thecurrencyriskarisingfromeitherlongorshortcurrencypositionslinkedtobusinessactivitiesandinvolvinganon-deliverablecurrency.Thecurrencyriskisacquiredbytheirtradecounterparties,whodosopossiblytospeculateonthefuturemovementoftheexchangerate,ortoarbitragebetweenratesinthespotandforwardmarkets,ortohedgeotherpositions.
ThequestionariseswhetherNDFmarketparticipantsbelongingtodifferentsectorstakesystematicpositionsinonedirectionortheother.Asa“thoughtexperiment”,weplotthenetnotionalvalueofpositionsatthesectorallevel(Chart7).Thisiscomputedbyconvertingallpositionsinacommoncurrency(USdollar)andoffsettingshortandlongpositionsacrossentitieswithinthesamesector.Theresultshowsthat,onasectoralbasis,non-financialfirmsandthepublicsectortendtotakenetpositionsaimedatoffloadingcurrencyriskfromnon-deliverablecurrencies.ThisisconsistentwiththeNDFmarketservingaprimaryeconomicfunctionofhedging.Ontheotherhand,banksandotherfinancialentitiestendtoacquirecurrencyrisk.TheyareeffectivelytheprovidersofmarketliquidityforthisOTCderivativeproduct.
FEATURE ARTICLE
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FEATURE ARTICLE UnDERsTAnDIng FoREIgn ExCHAngE DERIvATIvEs UsIng TRADE REposIToRy DATA: THE non-DELIvERABLE FoRWARD mARKET
CHART 7
Currency risk transfer in the nDF market by types of counterparty(Netnotionalpositionsinnon-deliverablecurrenciesbysector)
-20
-10
-15
-5
0
5
Sell non-deliverable currencyBuy deliverable currencySell deliverable currencyBuy non-deliverable currency
Non-financialfirms
Publicsector
Other financialentities
Unidentified
Banks
US$ bn
Source:HKTR,5January2018positions.
Notes:
1. ExcludesCCPsandIndividuals.2. Whilenetnotionalpositionscomputedacrossthewholemarketby
definitionoffseteachother,inthecharttheorangeandbluebarsdonothavetooffseteachotherinsize.EachsectorhasentitiesengaginginbothsidesofNDFtrades.Thesizeofthebarisfromoffsettinglongandshortpositionswithinthesamesector,whereasinrealitymanyNDFtradesarebetweenentitiesfromdifferentsectors.
3. ChangesinthestructureoftheNDFmarket
TheanalysisofHKTRdatasuggeststhatduring2016–2017,theNDFmarketstructurechangedalongthreedimensions:
• SharpincreaseofcentralclearingofNDFs;• ChangeinthecurrencycompositionofNDFs;
and• ShiftofsomeNDFactivitiesfrombankstoother
financialinstitutions.
a. SharpincreaseofcentralclearingofNDFs
During2016–2017,theNDFmarketexperiencedamarkedincreaseinNDFtradesbeingclearedthroughcentralcounterparties(Chart8).ThisisconsistentwithothermarketreportsanalysingCCPs’publicdisclosures.8TheriseincentralclearingintheNDFmarketisvoluntaryascentralclearingofNDFisnotmandatedinanymajorjurisdiction.
CHART 8
gross notional value of outstanding nDF positions being centrally cleared
0
500
1,500
1,000
2,000
US$ bn
NDF - intended to clearNDF - positions
NDF - not intended to clear
Jan2016
Jul Jan2017
Jul Jan2018
Source:HKTRpositionsforpublicdisclosure.
Note: “Intendedtoclear”isafieldreportedbythereportingentity.Tradesreportedbybothpartiesarecountedonlyonce.
AsshownintheHKTRdataasat31January2018,thegrossnotionaloutstandingintendedforcentralclearing(whichincludestradesthathadbeenclearedaswellasbilateraltradesthatwereexpectedtogothroughcentralclearing)wasUS$372billion,upfromUS$181billionayearearlierandfromUS$56billiontwoyearsearlier.
8 ChrisBarnes(2017),FX Clearing–The$750BNmarketthatkeepsgrowing,Clarus FT(www.clarusft.com/fx-clearing-the-750bn-market-that-keeps-growing).
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Thepercentageofnewtradesbeingclearedcentrally,whichwaspreviouslystableataround2%to4%levels,rosesharplyto12%inthefourthquarterof2016(Chart9).Itcontinuedtoriseandreached29%inthefourthquarterof2017.TakingintoaccountalloutstandingpositionsatthebeginningofJanuary2018,24%ofthetotaloutstandinggrossnotionalwascentrallycleared.
CHART 9
percentage of cleared nDF positions
24%
3%2%
4%
12%
15%
19%
22%
29%
0
35
30
25
20
15
10
5
% gross notional cleared
Cleared new tradesCleared positions
Q12016
Q2 Q3 Q4 Q2 Q3 Q4Q12017
Source:HKTR.
Note: Theredlinereferstonewtradesoriginatedin2016–2017.Thegreybarreferstooutstandingpositionson5January2018.
ClearingisnotequallycommonacrossAsiancurrencies.Inthepositionsoutstandingon5January2018,thecurrencieswiththelargestclearedvolumesweretheTaiwanesedollar,therenminbi,theIndianrupeeandtheKoreanwon(Chart10).Amongthesecurrencies,theclearingratewas27%fortheTaiwanesedollarandtheIndianrupee,22%forthe
renminbiand15%fortheKoreanwon.ThePhilippinepeso,theIndonesianrupiahandtheMalaysianringgithadsignificantlysmallerclearedvolumesandarangeofclearingrates.ThePhilippinepesohadthehighestpercentageofclearedtradesamongallAsiancurrenciesat31%.
CHART 10
Cleared nDF positions by currency
0
20
40
60
80
100
120
0
5
10
15
20
25
30
35
27%
22%
27%
15%
31%
22%
15%
US$ bn
% cleared positions (rhs)Cleared positions, gross notional outstanding (lhs)
TWD CNY INR KRW PHP IDR MYR
% gross notional
Source:HKTR,5January2018positions.
OnedriverofthevoluntaryincreaseincentralclearingofNDFsislikelytohavebeentheimplementationofreformsonmarginrequirements,whichalteredtherelativepricesofclearedandunclearedderivatives.Box2outlineshowmarginrequirementswereimplementedinmajorjurisdictionsandhow,bymakingitmorecostlytoholdunclearedOTCderivatives,thereformhascreatedincentivesforvoluntaryclearing.
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Box 2
How reforms on margin requirements affected the nDF market
Theyears2016–2017sawtheintroductionoftwonewmajorpoliciesintheOTCderivativesmarket:mandatoryclearingofcertainproductsandmarginrequirementsonunclearedderivatives.Thelatterreferstotherequirementthatcounterpartiespostcollateraltoeachotherinrelationtoderivativesthatarenotcentrallycleared.TheaimofbothpoliciesistoincreasetheclearingoftradesthroughcentralcounterpartiestoreducethelevelofbilateralcounterpartyriskintheOTCderivativesmarket.
Thetwopoliciesactthroughdifferentchannels.Mandatoryclearingrequirestheclearingofcertainproductsdeemedliquidbyregulators.Marginrequirementsoperatethroughprivateincentivesbychangingtherelativepricesofclearedandunclearedderivatives.9
During2016–2017,FXproductswerenotcoveredbymandatoryclearinginanyofthemajorjurisdictions.MarginrequirementsappliedinsteadtonewOTCderivativestradesinallassetclasses,withminorexclusionswhichdidnotaffectNDFs.
ThemajorjurisdictionsimplementedmarginrequirementsbetweenSeptember2016andSeptember2017.Theexacttimingvaried(Table1).Asaresult,HKTRdatafor2016–2017includedanincreasingnumberoftradessubjecttomarginrequirements,forwhichtherelativecostofholdinganunclearedderivativewouldhaverisen,allelsebeingequal.
TABLE 1
Timeline of implementation of margin requirements in major jurisdictions
1 Sep 2016 4 Feb 2017 1 Mar 2017 1 Sep 2017
USCanadaJapan
EU
Initial Margin (IM)
Korea
Variation Margin (VM)All the above
countries
Hong KongAustraliaSingapore
Note:Doesnotincludetransitionalarrangementsappliedincertainjurisdictions.
9 Marginrequirementshavetwocomponents:anInitialMargin,postedbyeachpartyatthestartofatradetoprovidecollateraltooffsetlossescausedbyitsownpotentialfuturedefault,andaVariationMargin,exchangeddailyasafunctionofthemark-to-marketvalueofthederivative.
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b. ChangeincurrencycompositionofNDFs
The2016BISTriennialsurveyhighlightedareshuffleinthecurrencycompositionofNDFsovertheperiod2013–2016,withariseinNDFsintheKoreanwonandtheTaiwanesedollar,andareductioninNDFsintherenminbi,whichwasmainlyattributabletotheincreasinguseofthedeliverableforwardmarket.10
Chart11plotsthecurrencycompositionofNDFsasshownintheHKTRdataatthreepointsintime.ThetrendsareconsistentwiththeearliertrendshighlightedbytheBISTriennialSurvey.InJanuary2018,theTaiwanesedollarandtheKoreanwonwerethelargestnon-deliverablecurrencies,followedbytherenminbi.Whiletherenminbiwasstillthelargestnon-deliverablecurrencyin2016asshownintheHKTRdata,itsuseintheNDFmarketdeclinedby32%during2017.Ontheotherhand,theTaiwanesedollargrewby89%,theKoreanwonby11%andtheIndianrupeeby76%betweenJanuary2016andJanuary2018.
CHART 11
Change in non-deliverable currencies
0
100
200
300
400
15 Jan 2016 6 Jan 2017 5 Jan 2018
TWD KRW CNY INR MYR Others
US$ bn
Source:HKTR,positionsat15January2016,6January2017and5January2018.
AnotherdevelopmentinthemarketistheemergenceofNDFsthatusedeliverablecurrenciesonbothsidesofthetrade.WhiletheseaccountedforonlyanegligibleshareofgrossnotionaloutstandingintheHKTRdatafornow,marketreportssuggestthattheiruseisgrowingforriskmanagementpurposesunderthenewlyimplementedpolicyofmarginrequirements.11
c. ShiftofsomeNDFactivitiesfrombankstootherfinancialinstitutions
ThethirdchangethattookplaceinthemarketstructureofNDFsover2016–2017wastherelativedeclineofNDFpositionsbybanksandtheincreaseinpositionsbyotherfinancialentities.Theseincludedinvestmentbanks,assetmanagers,hedgefundsandinsurers.Amongreportingentities,therelativeshareofbanksfellfrom85%inthefirstquarterof2016to63%inthefourthquarterof2017(Chart12).Correspondingly,theshareofotherfinancialentities(relativetobanks)increasedfrom15%to37%.
CHART 12
nDF gross notional reported by banks vs other financial entities
0
25
50
75
100
%
Q12016
Q2 Q3 Q4 Q2 Q3 Q4Q12017
2016Q1:15%
2017Q1: 28%
2017 Q4:37%
2016 Q1:85%
2017 Q1:72%
2017 Q4:63%
Banks
Other financial entities
Other financial entities Banks
Source:HKTR,5January2018positions.
Note: ThetotalistheoutstandingNDFgrossnotionalreportedatapointintimebybanksorbyotherfinancialinstitutions.Excludestradesreportedbyotherentitiesaswellasintragrouptrades.Thesharesarebasedonwhoreportedthepositions.
10McCauleyRandCShu(2016),“Non-deliverableforwards:impactofcurrencyinternationalisationandderivativesreform”,Quarterly Review, Bank for International Settlements,December(www.bis.org/publ/qtrpdf/r_qt1612h.pdf).
11ChrisBarnes(2017),G10FXNDFClearing,Clarus FT(www.clarusft.com/g10-fx-ndf-clearing).
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Non-bankfinancialentitiescontributedsignificantlytotheincreaseinclearingintheNDFmarket.Inthefourthquarterof2017,theyclearedonaverage47%oftheirownnewtrades,ascomparedwith27%bybanks(Chart13).
CHART 13
percentage of cleared new nDF trades by banks vs other financial entities
12%14% 15%
19%
27%
5%
23%
28%
35%37%
47%
0
50
40
30
20
10
%
Other financial entitiesBanks
Q12016
Q2 Q3 Q4 Q2 Q3 Q4Q12017
Source:HKTR,newtradesoriginatedin2016–2017.
Note: Basedonwhoreportedthetrades.Thegreylinerepresentstheshareofclearedtradesreportedbybanksoutofthetotalgrossnotionalofnewtradesreportedbybanks.Theredlinedoesthesameforotherfinancialentities.
4. Conclusion
ThisarticlepresentsananalysisoftheNDFmarketusingdatafromtheHKTR.NDFisatypeofforwardcontractsforhedgingcurrencyriskorprofitingfromcurrencyvolatility,withasettlementprocessthatmakesitsuseattractive,inparticular,forAsianandLatinAmericancurrencies.
Intermsofmarketstructure,theNDFmarketismostlytradedatveryshortmaturities.ThemajorcurrenciestradedinHongKongaretheTaiwanesedollar,theKoreanwonandtherenminbi.Mostoftheoutstandingpositionsareheldbybanksandotherfinancialentities.Whilenon-financialcompaniesarelessintensiveusersofNDFs,theyareimportantholdersofnetpositionsinNDFs,typicallytooffloadthecurrencyriskfromnon-deliverablecurrencies.
Overthepasttwoyears,theNDFmarketexperiencedthreemajorchanges:amarkedincreaseincentralclearing;achangeincurrencycomposition;andincreasinginvolvementbyotherfinancialinstitutionsrelativetobanks.ThemagnitudeandspeedoftheincreaseinvoluntaryclearingofNDFsaresignificant.Reformsonmarginrequirementsareaplausibledriverofthisphenomenon.BymakingitmorecostlytoholdunclearedOTCderivatives,thereformislikelytohavecreatedincentivesforvoluntaryclearing.
Box 3
Trade repositories as a data source
ThedatausedforthisarticlearefromtheHKTR,thetraderepositoryforOTCderivativessetupinHongKongaspartoftheframeworkformandatoryreportingofOTCderivatives.
Traderepositorydataareeffectivelyaformof“bigdata”onbanksandotherentitiesoperatingintheOTCderivativesmarket.DataarecollectedcontinuouslyfromreportingentitiesontradesandpositionsinthevariousOTCderivativeproductssubjecttomandatoryreporting.Thelargevolumeofdatarequiressuitableanalyticalmethodsfordetailedexamination.
Exploitingthisnewsourceofdataallowsregulatorstoanalysethedatainaflexibleway,testhypothesesandmapconcentrationsandinterconnections.
