Analysis: As 2014 heads into its twilight weeks, will the year end on a high note?

This year has provided many firms across the entire spectrum of the FX industry, institutional and retail, bank and non-bank, with a complete dichotomy in market dynamics. Indeed, revenues for allcomers had remained very low since even before this year began, with October last year’s sudden and stultifying drop in volatility setting the scene for almost a year of frugality for most companies, and shrinking of operations for some.

Suddenly, in September, the entire global markets woke up with a start, and sent volumes into record figures among firms in North America, Russia, Europe and the Far East.

Whilst September’s healthier balance sheets were accompanied by some of the high value acquisitions that have become somewhat commonplace in the FX industry these days, the cold statistics paint an overall picture of how businesses can form their plans for the year ahead.

As late into the second half of the year as June, The notional amount of outstanding OTC derivatives contracts across all markets globally totalled $691 trillion, which is, down by 3% from $711 trillion at end-2013 and back to a level similar to that reported at the end of June 2013, which was the peak of an extremely fruitful period for many firms, with two Japanese retail companies, DMM Securities and GMO Click experiencing a few consecutive months with over $1 trillion in monthly volume, the lofty heights of which GMO Click began to revisit in October this year.

Whilst it has been clearly documented in many company reports and across the pages of industry research sites that gross market values of outstanding OTC derivatives continued to decline the first half of 2014, it is perhaps of value to put a total figure on it across the entire market. By the end of June this year, gross OTC derivative market values stood at $17 trillion which is 7% less than the end of December last year, despite the last quarter of 2013 having not brought the volumes which led to a very buoyant summer period last year. This figure is also some 14% down from the $20 trillion as of the end of June 2013 due to those exact high points of trading activity.

Whereas in 2013 the decline had been concentrated in interest rate derivatives, in the first half of 2014 the gross market value of foreign exchange derivatives also fell significantly.



Foreign exchange derivatives make up the second largest segment of the global OTC derivatives market. By the end of June 2014, the notional amount of outstanding foreign exchange contracts totaled $75 trillion, which represented 11% of OTC derivatives activity.

The gross market value of foreign exchange derivatives fell to its lowest level for several years. The market value declined to $1.7 trillion at end-June 2014 from $2.3 trillion at end-2013 and $2.4 trillion by the end of June 2013. Contracts against the US dollar, which represented 87% of the notional amount outstanding at the end of June 2014, and the yen accounted for most of the decline in gross market values.

With regard to viewing the FX market on a segmented basis, currency swaps – which typically have a longer maturity than other foreign exchange derivatives and thus are more sensitive to changes in market prices – accounted for the largest proportion of the gross market value.

This is an interesting matter, as many spot FX firms have been interested in entering the British CFD market, with companies establishing FCA regulated offices in the region, and GAIN Capital having bought City Index for $118 million which is no mean feat at a time when volumes have been down and GAIN Capital’s overall revenues actually stood at a loss at one stage this year.

The nature of the CFD market was formed during the 1990s in London in which a type of equity swap that was traded on margin, thus perhaps the interest showed by firms in taking this overseas can be clarified somewhat when it bears such similarity to the swaps that uphold a vast part of the globl market. It is worth considering the possible connection between the interest among global FX firms in taking British CFD firms to new international markets and the fact that currency swaps which also have a long maturity date, represented the lions share of the gross value in the first six months of this year.

Turns of fortunes of exactly the nature of that experienced by GAIN Capital during this year have not been reserved purely for Western companies such as GAIN Capital. Hong Kong-focused KVB Kunlun managed to erase the losses that it made in the first half of 2014 with a bumper third quarter, sending the firm’s share price skyward, with a 130% increase in value. Unlike GAIN Capital whose empire is ever increasing as the company gains more and more buying power, KVB Kunlun’s good fortunes turned it into a takeover target, with an undisclosed investor having proposed acquisition of the majority of its stock this week. Subsequently, due to the firm having announced this, the stock went back down in value yesterday.

In contrast to the interest rate derivatives market, in the foreign exchange derivatives market inter-dealer contracts continued to account for nearly as much activity as contracts with other financial institutions during the first half of the year. The notional amount of outstanding foreign exchange contracts between reporting dealers totaled $32 trillion at the end of June 2014, and contracts with financial counterparties other than dealers $34 trillion.

The inter-dealer share has averaged around 43% since 2011, up from less than 40% prior to 2011. Among instruments, inter-dealer activity accounts for a greater share of more complex contracts, such as currency swaps which represented 53% of notional amounts and options which represented 46%. Despite this, the battle for supremacy between Thomson Reuters’ FXall and ICAP’s electronic brokerage division EBS has clearly defined these two interdealer platforms as close rivals, however examining performance over September and October has stood them apart with FXall having been unable to maintain the sharp upward direction in average daily volumes that has benefited EBS.



At a time when the entire global order flow is beginning to show signs of inscribing 2014 into the annuls of electronic trading history as a year which finished on a high note, having recovered from the burdensome lows of the first half of the year. Can this be sustained into 2015?

Data and graphs courtesy of the Bank for International Settlements

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