Info Service on Finance and Development (May14/04)
19 May 2014
Third World Network
OTC derivatives market continues to rise
Published in SUNS #7802 dated 13 May 2014
Geneva, 12 May (Kanaga Raja) - The outstanding notional amount of
over-the-counter (OTC) derivatives totalled $710 trillion at the end
of 2013, an increase from $693 trillion at end-June 2013 and $633
trillion at end-2012, the Bank for International Settlements (BIS)
Adjusted for exchange rate movements, notional amounts at end-2013
were about 1% higher than at end-June 2013 and 13% higher than at
end-2012, it said.
In contrast to the rise in the notional amounts, the Basel-based BIS
reported a decline in the gross market value of outstanding OTC derivatives
- the cost of replacing all outstanding contracts at market prices
prevailing on the reporting date - to $19 trillion at the end of 2013,
from $20 trillion at end-June 2013 and $25 trillion at end-2012.
In its latest statistics on the OTC derivatives market, BIS said that
the decline "was driven by interest rate derivatives and, in
particular, by a narrowing between market interest rates on the reporting
date and the rates prevailing at the inception of the contracts."
According to BIS, the gross market value represents the maximum loss
that market participants would incur if all counterparties failed
to meet their contractual payments and the contracts could be replaced
at current market prices.
Gross credit exposures equalled $3.0 trillion at end-December 2013,
down from $3.8 trillion at end-June 2013, representing 16.3% of gross
market values at end-December 2013, which BIS said was a bit higher
than the 2009-12 average of 15.1%.
With respect to the market for credit default swaps (CDS), BIS said
that central clearing and netting made further inroads, in that contracts
with central counterparties (CCPs) accounted for 26% of notional CDS
outstanding at end-2013.
"Bilateral netting agreements reduced the net market value of
outstanding CDS contracts, which provide a measure of exposure to
counterparty credit risk, to 21% of their gross market value,"
On interest rate derivatives, whose segment accounts for the majority
of OTC derivatives activity, BIS reported that for single currency
interest rate derivatives at end-December 2013, the notional amount
of outstanding contracts totalled $584 trillion, which represented
82% of the global OTC derivatives market.
"At $461 trillion, swaps account for by far the largest share
of outstanding interest rate derivatives."
According to BIS, the recent trend in the global market of increasing
notional amounts but declining market values was driven by developments
in the interest rate segment.
"Even as notional amounts rose, the gross market value of interest
rate derivatives declined to $14 trillion at end-2013, from $15 trillion
at end-June 2013 and its most recent peak of $20 trillion at end-2011.
Such declines were reported for interest rate derivatives denominated
in most of the major currencies."
BIS noted that long-term bond yields and swap rates in these currencies
rose in mid-2013 after announcements in May that the US Federal Reserve
envisaged phasing out quantitative easing.
"The decline in the gross market value of interest rate derivatives
over this period suggests that the bond market sell-off narrowed the
gap between market interest rates on the reporting date and the rates
prevailing at contract inception," it said.
Increases in the notional amount of interest rate derivatives were
concentrated in the medium- and long-term segments, said BIS, pointing
out that the notional amount of contracts with a remaining maturity
of one to five years rose to $234 trillion at end-2013, from $180
trillion one year earlier, or to 40% of all maturities outstanding,
The notional amount of contracts with a remaining maturity greater
than five years rose to $152 trillion, from $119 trillion over the
same period, or to 26% of all maturities, from 24%.
"The increased activity in the medium- and long-term segments
may have reflected investors' changing expectations about the persistence
of low policy rates and large-scale asset purchases by central banks
over the medium term," BIS explained.
It further said that the distribution of interest rate derivatives
by counterparties points to a continued shift in activity towards
financial institutions other than dealers, including central counterparties
The notional amount of interest rate contracts between derivatives
dealers has been falling steadily since 2011, to $96 trillion at end-2013
compared with the (post-2008) peak of $159 trillion at end-June 2011.
Contracts between dealers and other financial institutions stood at
$470 trillion at end-2013, or 80% of all contracts, up from $355 trillion,
or 64%, at end-June 2011.
"The shift towards central clearing exaggerates the growth in
notional amounts for other financial institutions because, when contracts
are cleared through CCPs, one trade becomes two outstanding contracts,"
Turning to foreign exchange derivatives, which make up the second
largest segment of the global OTC derivatives market, BIS reported
that the notional amount of outstanding foreign exchange contracts
at end-December 2013 totalled $71 trillion, which represented 10%
of OTC derivatives activity.
"The latest data show little change in the instrument composition
of foreign exchange derivatives. Forwards and foreign exchange swaps
accounted for close to half of the notional amount outstanding. However,
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
In contrast to the interest rate derivatives market, BIS said that
inter-dealer contracts in the foreign exchange derivatives market
continued to account for nearly as much activity as contracts with
other financial institutions.
"The notional amount of outstanding foreign exchange contracts
between reporting dealers totalled $31 trillion at end-December 2013,
and contracts with financial counterparties other than dealers about
the same amount."
The inter-dealer share has averaged around 43% since 2011, up from
less than 40% prior to 2011, said BIS, adding that inter-dealer activity
is especially significant in the yen and US dollar markets, where
it accounted for 52% and 47%, respectively, of notional amounts at
Among instruments, inter-dealer activity accounts for a greater share
of more complex contracts, such as currency swaps (54% of notional
amounts) and options (49%).
With respect to credit default swaps (CDS), BIS noted that in 2007,
credit derivatives had come close to surpassing foreign exchange derivatives
as the second largest segment in the global OTC derivatives market,
but notional amounts have since declined steadily.
"Notional amounts of CDS fell to $21 trillion at end-2013 from
$29 trillion at end-2011 and a peak of $58 trillion at end-2007. The
gross market value of CDS fell to $0.7 trillion at end-2013, from
$1.6 trillion at end-2011. The net market value fell to $139 billion
from $417 billion over the same period."
According to BIS, this net measure takes account of bilateral netting
agreements covering CDS contracts but, unlike gross credit exposures,
is not adjusted for cross-product netting.
BIS attributed the decline in overall CDS activity mainly to a contraction
in inter-dealer activity.
It said that the notional amount for contracts between reporting dealers
fell to $11 trillion at end-December 2013, from $14 trillion at end-2012,
while notional amounts with banks and securities firms also fell,
to less than $2 trillion, from $3 trillion over the same period.
"Trade compression continued to eliminate redundant contracts,
although the volume of compressions has slowed from the peaks of 2008-09,"
Central clearing, which BIS said is a key element in global regulators'
agenda for reforming OTC derivatives markets to reduce systemic risks,
made further inroads in the CDS market in 2013.
The shift towards central clearing had made significant progress in
2010-11, when the share of outstanding contracts cleared through CCPs
had risen from less than 10% to 19%.
However, BIS noted, in 2012, progress stalled, with the share stagnating
at 19%, and that in 2013, contracts with CCPs rose to account for
26% of all CDS contracts at year-end. The share of CCPs is highest
for multi-name products, at 37%, and much lower for single-name products,
at 17%, it said.
Contracts on CDS indices in the multi-name segment tend to be more
standardised than those in the single-name segment, which thus makes
the former more amenable to central clearing, BIS emphasised.
Owing in part to the shift towards central clearing, the CDS market
has seen an increase in netting, which BIS said enables market participants
to reduce their counterparty exposure by offsetting contracts with
negative market values against contracts with positive market values.
"A comparison of net market values with gross market values indicates
the prevalence of legally enforceable bilateral netting agreements.
As a result of the increased use of such agreements, net market values
as a percentage of gross market values fell to 21% at end-2013, from
24% at end-2012 and 26% at end-2011."
BIS said that the prevalence of netting is greatest for CDS contracts
with CCPs and other dealers, where it reduced the ratio of net to
gross market values to 9% and 15%, respectively, at end-2013, and
that it is lowest for those with insurance companies (83%) and special
purpose vehicles (57%).
BIS further reported that the distribution of underlying reference
entities indicates that contracts referencing non-financial firms
have declined at a somewhat more rapid pace than those referencing
Outstanding CDS contracts referencing non-financial firms stood at
$7 trillion at end-December 2013, representing 34% of all CDS, and
that this is down from 37% at end-2012 and 40% at end-2011 (when this
breakdown was first reported).
Contracts referencing financial firms stood at $6 trillion at end-2013,
followed by securitised products and multiple sectors at $5 trillion,
and sovereigns at less than $3 trillion.
By rating, contracts referencing investment grade entities equalled
$13 trillion and those referencing lower-rated or un-rated entities
"The distribution of outstanding CDS by location of the counterparty
showed little change in 2013. The CDS market is very international;
CDS with counterparties from the same country in which the dealer
is headquartered accounted for only 19% of outstanding contracts at
end-2013, or $4 trillion. Most of the foreign counterparties were
from Europe, followed by the United States."
BIS further reported that the notional amount of OTC derivatives linked
to equities or commodities totalled $9 trillion at end-December 2013,
and the gross market value at $1 trillion.
"Activity in equity-linked contracts declined precipitously in
2008-09 but has since fluctuated around levels similar to the notional
amount reported at end-December 2013, $6.6 trillion."
By contrast, said BIS, activity in commodity contracts continues to
decline, in that dealers expanded their commodity derivatives business
rapidly between 2004 and 2008 but subsequently scaled back their outstanding
The notional amount of outstanding OTC commodity derivatives contracts
declined to $2.2 trillion at end-2013, from $2.9 trillion at end-2009
and a peak of $8.5 trillion at end-2007, said BIS.