* Aggregated turnover in the euro money market decreased for the first time since 2004 (in the second quarter of 2008, as compared with the second quarter of the previous year). The most notable decreases in activity took place in the following segments: overnight index swaps (OIS) (-32%), the secured market (-16%) and the unsecured market (-12%). The secured segment remains the largest segment of the euro money market.
* As regards the over-the-counter (OTC) derivatives market, apart from the significant decline in the OIS segment, it is remarkable that the turnover in forward rate agreements (FRAs) between the second quarter of 2007 and the second quarter of 2008 almost doubled. In the same period, turnover in interest rate swaps excluding OIS increased sharply. Transaction volumes in foreign exchange swaps and in short-term securities markets remained broadly unchanged between the second quarter of 2007 and the second quarter of 2008.
* In terms of concentration of volumes across market participants, the unsecured market segment remained the least concentrated segment, followed by the secured market segment.
* In almost every market segment, the proportion of electronic trading decreased and the proportion of direct and voice-brokered deals increased.
* The qualitative part of the study shows that, according to the respondents, market liquidity and efficiency deteriorated in most of the segments of the euro money market between the second quarter of 2007 and the second quarter of 2008.
Overall turnover in the euro money market decreased in the second quarter of 2008, for the first time since 2004, by around 5% year-on-year, after the strong year-on-year growth recorded in 2006 and the slight increase observed in 2007. The most notable decrease in activity took place in secured deposits (also referred to as “repos” in this study) (-16%), unsecured deposits (-13%) and overnight index swaps (-32%). The fall in the activity in the secured and unsecured deposit segments resulted from tight and volatile market conditions that fuelled counterparty credit concerns on one hand and, on the other hand, put pressure on banks to reduce their credit, market and liquidity risk exposures. Despite this decline in overall turnover, the secured market
segment remained the largest segment of the euro money market, accounting for one-third of the overall euro money market activity.
The largest decline in activity took place in the overnight index swaps (OIS) segment. In contrast, turnover in forward rate agreements (FRA) and interest rate swaps other than OIS (“other IRS”) increased. Indeed, OIS turnover decreased by 32% between the second quarter of 2007 and the second quarter of 2008, while FRA turnover and the other IRS turnover increased by 105% and 43% respectively. The shift from OIS to FRA and other IRS reportedly occurred because of changes in hedging and positioning activity of the respondent banks against the background of fi nancial market turbulence. Transaction volumes on the foreign exchange (FX) swap and short-term securities markets remained broadly unchanged between the second quarter of 2007 and the second quarter of 2008. Turnover in the cross-currency swap segment rose by 51%, yet this remained by far the smallest segment of the euro money market, accounting for less than 1% of overall activity.
Apart from a few changes in some segments, which might prove to be a temporary phenomenon related to the financial market turbulence, there were no signifi cant structural changes in maturity distribution in most money market segments. Activity in the unsecured, secured and FX swap markets continued to be largely concentrated in very short-term maturities. In the same vein, turnover in maturities above one year decreased substantially both in the unsecured segment (-21%) and, even more so, in the secured segment (-61%). A shift to shorter maturities was also recorded in other IRS and cross-currency swaps, which are typically instruments traded at longer maturities. Although the bulk of activity in these segments remained in maturities above two years, the share of shorter maturities increased from 35% to 40% in other IRS and from 19% to 37% in cross-currency swaps.
In contrast, the above-mentioned substantial reduction in OIS turnover had a bigger impact on shorter maturities. The share of OIS turnover
at maturities up to one month declined from 64% in 2007 to 48% in 2008, while the share of transactions at longer maturities increased.
The degree of concentration in most market segments remained rather high and even increased further, especially in unsecured deposits, OIS, other IRS, FRA and short-term securities, which may suggest that adverse market conditions contributed to a reduction in a number of players in these market segments. In the over-the-counter derivatives market segment, concentration remained high, notwithstanding the reduction observed in some segments since the last survey (FX and crosscurrency swaps). Similar to previous years, the unsecured deposit market has remained by far the least concentrated segment in the euro money market, followed by the secured deposit market segment.
The structure of turnover in the various segments of the euro money market did not change signifi cantly in terms of geographical distribution of counterparties, and the bulk of business has continued to be carried out with counterparties from the euro area. However, the survey reveals that, in the second quarter of 2008, volumes traded with counterparties outside the euro area contracted in all market segments, apart from the unsecured and secured deposits market. This could suggest that the financial market turbulence dampened fl ows of money market instruments between the euro area and the rest of the world. In addition, some segments recorded some “repatriation” of activity as the share of business conducted within national borders increased. This phenomenon was most pronounced in unsecured deposits (from 28% in the second quarter of 2007 to 33% in the second quarter of 2008) involving mainly small banks that had greater access to national than euro area funding sources.
The financial market turbulence appears to have also had an impact on the way respondent banks executed transactions with counterparties. The proportion of electronic trading decreased and the proportion of voice broker deals increased in almost every market segment, reversing the trend observed in these two modes of trading until the second quarter of 2007, pointing to some reluctance to use non-anonymous means of trading.
Finally, the qualitative part of the survey reveals that the financial market turbulence also adversely affected market liquidity and efficiency in various segments of the euro money market. The deterioration in market liquidity conditions was perceived to be greatest in the unsecured deposits, secured deposits and OIS segments. These three segments were also those in which the biggest effi ciency losses were reported.
