LONDON (Reuters) - Global daily currency turnover surged to a record $6.6 trillion, with London shrugging off Brexit uncertainty to extend its lead as the world’s dominant trading hub, the Bank for International Settlements (BIS) said on Monday.

FILE PHOTO: Euro, Hong Kong dollar, U.S. dollar, Japanese yen, British pound and Chinese yuan banknotes are seen in this picture illustration, January 21, 2016. REUTERS/Jason Lee/Illustration

Foreign exchange markets had been shrinking when the BIS released its last triennial forex survey - considered the most comprehensive take on what is the world’s largest financial market - in 2016 as banks and hedge funds pulled back from trading.

The latest edition, however, shows the market has bounced back with a hefty 29% jump in daily trading volumes from the $5.1 trillion recorded in 2016, lifted by huge growth in FX swaps activity, the rise of new proprietary and high-speed trading firms and more demand for emerging market currencies.

But the topline increase in daily global FX turnover hides growing headwinds facing the industry. Among them is the rise of FX swaps used by banks and investors to hedge their currency exposure and which typically generate less revenue than plain old cash trading or highly complex and structured deals.

The survey by the BIS, a central bank umbrella group, showed that spot, or cash, volumes continued to decline, slipping to 30% of all daily volumes from a peak of 38% in 2013. FX swaps, meanwhile, gained market share and totalled 49% of all volumes in April 2019, up from 47% in the previous survey.

“Growth of FX derivatives trading, especially in FX swaps, outpaced that of spot trading,” the BIS said.

Graphic: OTC foreign exchange turnover,

The BIS collated the data from volumes reported in April by nearly 1,300 financial institutions across 53 jurisdictions.

In a separate survey, the BIS said the market for over-the-counter interest rate derivatives more than doubled to $6.5 trillion from $2.7 trillion in 2016, driven mainly “by increased hedging and positioning amid shifting prospects for growth and monetary policy”.

The BIS said improved reporting contributed to the rise. Britain recorded the biggest share of daily turnover, accounting for $1 in every $2 of interest rate derivatives traded.

LONDON DOMINANCE

The survey also showed the United Kingdom extending its dominance of the FX trading industry, defying sceptics who had predicted Britain’s 2016 referendum vote to leave the European Union would damage London’s financial services sector.

Foreign exchange is the crown jewel of London’s financial sector. Industry experts say the city’s convenient time zone and its grip on FX trading infrastructure and personnel mean the sector could emerge unscathed from all the Brexit uncertainty.

The BIS said London’s share of daily volumes rose to 43%, up from 37% in 2016, while the United States’ share shrank to 17% from 20%. In Asia, growing volumes in Hong Kong offset weakness in Singapore and Tokyo.

“This is testament to London’s long-standing global trading relationships, concentration of counterparties and continued investment in technology infrastructure,” said Dan Marcus, CEO of ParFX, an electronic spot FX trading platform.

“From a foreign exchange perspective, there is no doubt that London remains a global centre of excellence.”

Notably, mainland China registered an 87% increase in trading activity to become the eighth-largest forex trading centre, up from 13th in 2016.

EMERGING ASIA GAINS, YEN SHARE SHRINKS

The dollar .DXY remained the world's most dominant currency and was on one side of 88% of all trades.

There was little change in the ranking of the major currencies and market shares, though lower volatility in dollar-yen JPY= trading led to a drop of 5 percentage points in the Japanese yen's share to 17%, keeping it in third place behind the euro.

Graphic: Currency distribution of OTC FX turnover,

Sterling's GBP= share stood at 13%, unchanged from three years earlier despite prolonged bouts of Brexit-induced volatility, remaining ahead of the Australian AUD= and Canadian dollars CAD=.

Emerging market currencies raised their share to 25%, up from 21% in 2016. The growth came from a jump in Hong Kong dollar trading HKD=, as well as in the Korean won KRW=, Indian rupee INR= and Indonesian rupiah IDR=, the BIS said.

Despite Beijing's push to broaden international use of the Chinese currency in recent years, the survey showed the yuan CNY= rising in line with overall market growth, leaving it with a 4.3% market share behind the Swiss franc CHF=.

The Mexican peso MXN= and Turkish lira TRY= - the latter suffering a currency crisis in 2018 - dropped in the rankings.

Banks trading with “other financial institutions” - including nonreporting banks, hedge funds, proprietary trading firms, institutional investors and official sector financial institutions - grew significantly to $3.6 trillion, 55% of the global total, BIS said.

That included growing activity by smaller regional banks - reflecting their strength in FX swap activity - and hedge funds. Institutional investor participation, however, declined to 12% of global FX turnover from 16% three years earlier.