Derivatives markets in emerging economies have continued to grow sincedriven mostly by very strong growth in the OTC market. Emerging market currencies have become more international as offshore markets are a major contributor to FX turnover. The Chinese renminbi is actively traded within emerging Asia.

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Trading of emerging market currencies is positively related to the size of cross-border financial flows. Over the past decade, FX and derivatives markets in emerging market economies EMEs have grown rapidly.

In previous work, Milhaljek and Packer noted that EME derivatives were strongly outgrowing those of advanced economies, as well as becoming increasingly international. Has this trend continued? In EMEs, which derivatives are now traded, and who trades them? Which EME currencies are now most traded, and where are they traded? Have some EME currencies become regional lead currencies?

Is there a relationship between turnover in EME currencies and cross-border financial flows into and out of emerging markets? Our main findings are as follows. First, average daily turnover in EME derivatives has continued to grow sincedriven mainly by very strong growth in the over-the-counter OTC segment.

Second, growth of FX derivatives turnover has been strongest with "other financial institutions", which include official sector financial institutions. Third, offshore trading of EME currencies has surged, far outpacing the growth in total FX turnover in EME currencies.

Among the currencies with the highest turnover growth are the Chinese renminbi, Mexican peso, Turkish lira and Russian rouble.

Fourth, the Chinese renminbi is playing an increasingly prominent role in emerging Asia, although the regional significance of other EME currencies is much more limited.

Fifth, the trading of EME currencies is positively related to the size of cross-border financial flows. The remainder of this article is organised as follows.

The first section looks at the overall trends in derivatives trading in EME jurisdictions, both over-the-counter and on exchanges. In the second section, we shift our focus to EME currency trading, which goes well beyond the shores of the home economies. The third section analyses the link between financial flows and FX turnover in EME currencies. The final section concludes.

Derivatives markets in EMEs remain small compared with those in advanced economies. As discussed below, this reflects declining trading on EME exchanges; growth in OTC transactions has been strong. Another caveat to keep in mind is that trading in emerging market jurisdictions accounts for only a part of trading in EME derivatives owing to active offshore trading.

Derivatives turnover in EME jurisdictions tends to be more concentrated in the exchange rate segment.

FX derivatives account for just over half of total daily turnover, and equity and interest rate instruments for around one fifth each. The smaller role of interest rate derivatives in EMEs likely reflects the lesser depth and liquidity of their bond and money markets, together with the greater relevance of exchange rate risk for many EME economies.

OTC derivatives appear to play a bigger role in EMEs than exchange-traded derivatives. Growth in OTC FX derivatives turnover in emerging market economies has been very strong in recent years. In each of these instruments, growth in turnover was greater than in advanced economy markets. The share of FX derivatives in OTC FX market turnover is now significantly higher and spot turnover significantly lower than the corresponding shares in advanced economies. The major contribution of FX derivatives to the growth in EME currencies turnover is 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.

At the same time, international capital flows are increasingly having an impact on the stability of domestic economies and financial systems Lane The relatively smaller share of spot trading in the FX market turnover of EME currencies may also reflect the still limited scale of high-frequency trading HFT in these currencies, as HFT is more common in spot than in derivatives markets.

Growth of OTC FX derivatives turnover in emerging markets has differed considerably across types of counterparty Table 2. Increased dealing is most evident with "other financial institutions", which include non-reporting banks, institutional investors, hedge funds and proprietary trading firms as well as official sector financial institutions.

Several factors underpin this trend. In particular, whereas trading in major currencies has incurred very low transaction costs for some time, many EME currencies have only recently achieved lower costs of trading see Rime and Schrimpf The reduction of barriers to capital mobility in some countries may also account for an increasing importance of turnover with "other financial institutions".

In the past, limited capital account openness reduced the share of trading with financial customers Tsuyuguchi and Wooldridge Another possible explanation is that the activity of "other financial institutions" may in part reflect official sector interaction with currency markets, such as FX intervention where the official sector has leaned against appreciation pressures.

The new survey breaks down the category of other financial institutions into subcategories. Interest rate derivatives markets in EMEs are still at an early stage of development. Growth in EME interest rate derivatives turnover was almost completely driven by Asia. The lagging development of EME interest rate derivatives relative to FX markets is also reflected in the large share of the reporting dealer segment.

By contrast, in advanced economies how to make money from financial spread betting turnover share of reporting dealers is barely more than one third.

The earlier analysis has focused on FX trading in EME jurisdictionsbut in recent years the trading of EME currencies - in particular offshore - has been even more buoyant. This is well above the growth of FX transactions taking place in EME jurisdictions alone. Although starting from a much lower base, Latin America contributed virtually the same amount to the growth of EME currency turnover as did emerging Asia.

The most rapid growth in the turnover of EME currencies has been in the offshore component: While the offshore trading share of a currency is not the only indicator, it is an important gauge leverage terbaik dalam forex how international a currency is.

This is also consistent with previous periods such aswhen offshore trades were an equally dominant forex market economics makerere of turnover in EME currencies. Despite the growth in offshore trading, the trading of most EME currencies within their money exchange rate south african rand geographical region remains quite limited.

Within emerging Asia, the Chinese renminbi is playing an increasingly prominent role, as a significant part of its turnover is generated offshore within the region. In this respect the Chinese renminbi is unique among all major emerging market currencies.

Even though uk ecn forex broker high offshore ratio is in part due to restrictions on onshore trading, its greatly increased turnover within emerging Asia reflects China's increasingly dominant economic and financial role in the region Park and SongCheng et al No other major emerging market region possesses a regional currency with similar importance.

As American option monte carlo simulation currencies became increasingly international, the United Kingdom established itself as their leading forex margin definition trading hub.

The United Kingdom, however, hosts a large share of turnover in all EME currencies, with virtually no exceptions. And its role as an offshore trading hub has been expanding. Consistent with the growing internationalisation but limited regionalisation of EME currencies is the dominant and established role of the US dollar as a vehicle currency.

The improved reporting of offshore trades against major EME currencies in the survey allows, for the first time, a precise and comprehensive view on EME currency trades against the US dollar.

Overwhelmingly, the major EME currencies are traded against the US dollar - and this holds true for both the spot and the OTC derivatives market. The large increase in FX turnover has coincided with surging cross-border financial flows to and from emerging markets over the same period.

Very low interest rates and unconventional monetary policies in advanced economies during have increased the appetite of international investors and banks for emerging market assets CaruanaRey In addition, Fx emerging markets trading crises have encouraged many international investors to shift their focus more towards emerging markets.

Whereas the link between more broad-based macroeconomic measures, such as GDP per capita or cross-border trade, and FX market development is well documented, the link between cross-border financial linkages and FX market development has been less intensively studied. From EPFR, a data provider, we obtain weekly equity and bond mutual fund flows and their allocation to individual EMEs. We then approximate daily absolute turnover by averaging the sum of absolute weekly flows in April divided by the average number of working days over the 12 months leading up to the respective Triennial Survey dates Apriland FX market turnover is measured as the global turnover of the respective EME currencies from the Triennial Surveys.

Graph 4 shows the bivariate correlations of mutual fund portfolio flows and FX turnover for the major EME regions. The scatter plots depict one point for each country's gross cross-border portfolio flows x-axis, in logs scottish widows balanced growth fund share price global FX market turnover in the corresponding currency y-axis, in logs.

In each panel we plot all available portfolio flow-currency turnover pairs for the last three Triennial Surveys together. Consistent with the idea that international investors could be an important driver of the growing demand for EME currencies, each panel in Graph 4 exhibits a positive and statistically highly significant relationship between portfolio flows into and out of emerging markets and the FX market turnover in the respective currencies.

The estimated size of the link varies across EME regions, but is in all cases economically meaningful.

Emerging Markets

FX market growth in emerging market currencies is driven mainly by growth in derivatives markets. At the same time, an increasing share of emerging market currencies is traded offshore and, in that sense, these currencies are becoming more international. However, with the significant exception of the Chinese renminbi in emerging Asia, the offshore trading of EME currencies within their proximate geographical region is relatively small.

One explanation for both the strong growth in the derivatives market and the internationalisation of EME currencies is the increasing demand from international investors to expand or hedge exposure to currency risk, as reflected in the strong correlation between growth in EME currency turnover and cross-border mutual fund flows.

Cheng, X, D He and C Shu Forbes, K and F Warnock Learning from historical precedents", presentation at the Asia Pacific Equity Conference, Boston, Massachusetts, September.

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Does it matter if this changes? King, M and D Rime McCauley, R and M Scatigna Mihlajek, D and F Packer Park, Y and C Song Rime, D and A Schrimpf Tsuyuguchi, Y and P Wooldridge We are grateful to Claudio Borio, Robert McCauley, Andreas Schrimpf, Ilhyock Shim, Chang Shu, Christian Upper and Philip Wooldridge for comments on earlier drafts of the article.

We thank Jimmy Shek, Denis Petre and Bat-el Berger for their help with statistical analysis. But we think that is unlikely to be the case in emerging markets, at least not to the same extent, because HFT is more common in spot than in derivatives markets.

High-frequency trading in EME currencies, however, may pick up in the future, as EME currencies are increasingly featured on the relevant electronic trading platforms. Although a further breakdown of this category is not available, this likely reflects the smaller turnover share of institutional investors, hedge funds and proprietary traders. Typically, this is an indication of an early stage of market development. More generally, internationalisation implies a currency's increasing use by non-residents as a store of value eg international reserve holdingsa medium of exchange eg invoicing of tradeand a unit of account Frankel See also the discussion in Goldberg Untilthe reporting for "non-major" currencies was compulsory only in the issuing country, whereas reporting of offshore trades in non-major currencies was left to the discretion of the offshore jurisdiction.

See also footnote 5. Reporting of offshore turnover against the euro and Japanese yen has also been extended for more details, see www. An exception is the Polish zloty, which particularly in the spot market is exchanged mainly with the euro. Hence, our measure allows a more direct interpretation of the results, but it is narrower than the portfolio flows from balance of payments data used in the literature Forbes and Warnock When GDP is included in the regression, the coefficients on fund flows remain consistently positive, but the coefficients on GDP are insignificant or negative.

Estimates are highly similar when looking at the correlation between cross-border flows and derivatives market turnover only. This website requires javascript for proper use.

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