The global FX market and the Norwegian krone market

The FX market is the world’s largest financial market, with a daily turnover volume 30 times greater than daily global GDP, and 10 times larger than the daily turnover in US Treasuries. Unlike the centralized marketplaces for stocks in particular, but also some bonds, a vast share of the turnover in foreign exchange products is conducted ‘over-the-counter’ (OTC), bilaterally and across country borders in a less regulated market. As such, the FX market is considered less transparent and more fragmented, with limited real-time market visibility.

Every third year, the Bank for International Settlements (BIS) collects data on the turnover in the OTC foreign exchange and interest rate derivatives markets. The triennial survey is internationally acknowledged as the most comprehensive source for getting an overview of the global activity in the FX market. Over the last three decades, the turnover volumes in the FX market have risen exponentially. As per the latest survey from April 2022, the global FX market had a daily turnover of USD 7,5 trillion, or close to NOK 70 000 billion equivalent, see figure 1A.

The FX market for Norwegian kroner (NOK) largely shares the same characteristics as the global FX market. The turnover in the NOK market has also multiplied over the years, to a daily turnover equivalent of NOK 1100 billion, see figure 1B. With a share of the global FX market around 1,7 per cent, it is reasonable to call the NOK market rather small.

Figures 1A and 1B: Global FX turnover for all currencies (1A) and turnover in NOK (1B). Daily averages. Billion NOK. All instruments. Triennial years from 1992 to 2022.

Source: Triennial central bank survey of foreign exchange and OTC derivatives markets

The FX market's largest product categories in terms of turnover are spot and FX swaps. FX swaps are heavily used by financial institutions for funding- and risk management purposes. An FX swap has no direct impact on the FX rate, as it combines a spot and forward contract with a simultaneous purchase and sale of one currency for another, on two agreed dates. A spot or forward transaction is the exchange of one currency for another at an agreed settlement date (respectively T+2 or at a forward date) and is used by both financial and non-financial market participants. In contrast to a swap, these products consist of delivering one currency for another, and have the most direct effect on the exchange rate. In April 2022, the daily combined turnover of NOK spot and forwards reached nearly NOK 450 billion, as shown in figures 1B and 2A.

The BIS statistics further categorize FX turnover into three main counterparty categories: reporting dealers (large banks), other financial institutions (for example non-reporting banks, private and public institutional investors and asset managers, hedge funds) and non-financial customers (corporates).

Historically the corporate sector represented a decent share of the overall FX market, with FX needs arising from exchanging goods and services across country borders. While turnover from non-financial customers accounted for around 1/3 of overall volumes in the 1990s, their share of the global turnover over time has steadily declined. In contrast, the market share of both reporting dealers and other financials, or just financials combined, has grown ever larger. By 2022 one can truly call the market for NOK ‘financialized’, with financial transactions constituting almost 95 per cent of the total turnover, see figure 2B.   

Figures 2A and 2B: Global NOK turnover by counterparty categories: banks (reporting dealers), other banks¹⁾ (non-reporting dealers), other financials and non-financials. Spot and forwards. Daily averages in billion kroner (2A), and as a percentage share (2B). Triennial years from 1992 to 2022.

1) BIS reported on subcategories of ‘other financials’, therein ‘other banks’, for the first time in 2013.

Source: Triennial central bank survey of foreign exchange and OTC derivatives markets

Use of the BIS statistics: Estimated market share of Norges Bank’s FX transactions

We can use the BIS statistics as a benchmark for the daily turnover in the spot and forward market for Norwegian kroner to estimate the market share of Norges Bank’s FX transactions. Acting as an agent of the Ministry of Finance, Norges Bank is transacting kroner on behalf of the government as part of the petroleum fund mechanism.

Whether Norges Bank’s FX transactions on behalf of the government have been a significant share of the overall NOK market has been debated amongst market participants, especially considering that the volumes at times have been larger than in previous years.

Being conducted only every third year, the BIS survey is a low-frequency benchmark lacking day-by-day granularity. We can use alternative data sources to account for this. To estimate a benchmark with daily frequency for global NOK turnover in the spot and forwards market, we adjust the BIS survey data with daily spot turnover data from Refinitiv Matching[1] in NOK currency pairs. We further calculate whether the daily turnover on Refinitiv Matching was higher or lower compared to its yearly average and use this daily multiplier to extrapolate the turnover from the last three BIS triennial surveys. By this method we obtain a daily frequency for turnover in the NOK market, see figure 3B.

Figures 3A and 3B: Norges Bank’s daily FX transactions on behalf of the government (3A). Estimated daily turnover in the Norwegian spot and forward market by using the changes in daily turnover from Refinitiv Matching in NOK currency pairs¹⁾ as instrument²⁾ for extrapolating changes in BIS daily average spot and forward turnover (3B). Billion kroner. January 2018 to September 2023.

1) The instrument for daily turnover consists of spot turnover in EURNOK, USDNOK and NOKSEK on Refinitiv Matching.

2) The BIS average turnover in the market for spot and forwards is the benchmark. To estimate a daily measure of turnover, we use the turnover in NOK currency pairs over Refinitiv Matching as the extrapolating instrument. The instrument is calculated as the percentage deviation from the yearly average in Refinitiv NOK turnover. E.g. if Refinitiv Matching turnover a particular day is 50 per cent higher than the yearly average observed over Refinitiv Matching, the BIS benchmark is multiplied with an increase of 50 per cent.

Source: Norges Bank, Triennial central bank survey of foreign exchange and OTC derivatives markets, Refinitiv Matching

In this blog, we show three calculation methods to estimate the share of Norges Bank’s FX transactions of the overall NOK market.

Figure 4 shows Norges Bank’s transactions on behalf of the government as a percentage share of the estimated daily turnover for spot and forwards since 2018, calculated by the different methods described above. Overall, Norges Bank’s FX transactions on behalf of the government have on average represented far less than 5 per cent of the NOK market. In general, the market share increases when the transaction volume related to the petroleum fund mechanism increases. Further, days with increased market share also stem from periods of reduced turnover, for instance the first trading days in a new calendar year, or during summer or Easter holidays. The combination of these factors was particularly the case during the summer of 2020, when Norges Bank’s transactions increased markedly, at a time when the global turnover in NOK was muted. Interestingly, the average market share of Norges Bank was mostly below 5 per cent in the period from 2022 when the daily transactions on behalf of the government were historically large, even when using the most conservative calculation method with a “hot potato” multiplier.

Our calculations, admittedly associated with uncertain assumptions[2], indicate little evidence that Norges Bank’s transactions over time have been a significant share of the market for NOK.

Figure 4: Estimated share¹⁾ of Norges Bank’s FX transactions of the global turnover in the spot and forward market for NOK. Per cent. 14-day moving averages from January 2018 to September 2023.

1) The estimated market share is a result of having Norges Bank’s daily transactions in the numerator and the estimated global NOK turnover in the spot and forwards market in the denominator. The figure shows different calculation methods. As a benchmark for global NOK turnover, we use the sum of turnover in spot and forwards for all counterparties in the BIS survey. Alternatively, we subtract the turnover for ‘reporting’ and ‘other banks’ from the total turnover and calculate Norges Bank’s (NB) share of that aggregate. Lastly, we use a different approach by using the total turnover from BIS but multiplying Norges Bank’s daily transaction volume with 5, to account for a circulating (“hot potato”) effect of that volume in the interbank market before finding any end user.

Source: Norges Bank and Triennial central bank survey of foreign exchange and OTC derivatives markets

 

Footnotes

[1] Amongst market participants Refinitiv Matching is recognized as the primary venue for NOK trading, which means that a sizeable share of historical NOK turnover has been conducted via this trading venue. At the same time, Refinitiv Matching has lost market share over the years, but is still considered an important venue for price discovery and thus information on the competitive pricing of NOK currency pairs.

[2] The calculations are sensitive to what you assume the appropriate measure for the market of NOK to be. For instance, if we had used only the non-financial turnover as reflecting the market for NOK, Norges Bank’s share of that turnover had been significantly larger.