Info Service on Finance and Development (Nov18/01)
7 November 2018
Third World Network
Increased activity in global OTC derivatives market
Published in SUNS #8788 dated 5 November 2018
Geneva, 2 Nov (Kanaga Raja) - Activity in the over-the-counter (OTC)
derivatives markets increased in the first half of 2018, with the
notional amount of outstanding OTC derivatives contracts increasing
from $532 trillion at end-2017 to $595 trillion at end-June 2018,
the Bank for International Settlements ( BIS) has reported.
In its latest statistical release up to end-June 2018, BIS said that
this increase in activity was driven largely by US dollar interest
rate contracts, especially short-term contracts.
Nevertheless, the gross market value of outstanding derivatives contracts
- which provides a more meaningful measure of amounts at risk - continued
to decline, to $10 trillion, its lowest level since 2007, said BIS.
It attributed the decline in part to ongoing structural changes in
OTC derivatives markets.
According to the Basel-based central bank for the world's central
banks, gross credit exposures, which adjust gross market values for
legally enforceable bilateral netting agreements, remained stable
at $2.6 trillion at end-June 2018.
It said that the increase in notional amounts outstanding was driven
mainly by OTC interest rate derivatives, in particular for US dollar-denominated
contracts, which rose from $157 trillion at end-2017 to $193 trillion
at end-June 2018.
An increase in US dollar activity was also seen in exchange-traded
derivatives markets, where the average daily turnover of futures and
options on dollar interest rates climbed to a record high of $9.6
trillion in the month of February.
"This increased activity may reflect changing expectations about
the path of future US dollar interest rates during the period,"
The notional amounts outstanding of euro-denominated interest rate
derivatives also went up over this period, but more modestly, from
$122 trillion to $12 9 trillion.
BIS said that the increase in OTC interest rate derivatives activity
was concentrated in the short-term segment.
The notional amount of outstanding contracts with a remaining maturity
up to and including one year rose from $191 trillion to $231 trillion
between end-201 7 and end-June 2018.
The increase for contracts with a remaining maturity between one and
five years was less pronounced, from $140 trillion to $155 trillion.
On the other hand, longer-term contracts (with a remaining maturity
over five years) held roughly constant, at around $94 trillion.
As for the OTC foreign exchange (FX) derivatives markets, BIS reported
that notional amounts rose to a record high of $96 trillion at end-June
2018, up from $87 trillion at end-December 2017.
This was also driven by activity in short-term instruments, it said.
"In contrast to other OTC derivatives, most FX derivatives require
counterparties to repay the notional amount at maturity and thus can
be viewed as a form of collateralised borrowing, with the associated
foreign currency repayment and liquidity risks."
GROSS VALUES OF OTC DERIVATIVES CONTINUES DECLINE
Despite the increase in notional amounts in the first half of 2018,
the gross market values of outstanding OTC derivatives continued to
decline, said BIS.
Gross market values for all OTC derivatives stood at $10.3 trillion
at end- June 2018, down from $11.0 trillion at end-2017.
Over that same period, the gross market value of interest rate derivatives
declined by $1 trillion, ending at $6.6 trillion.
Other segments of OTC derivatives markets saw smaller movements, with
FX derivatives increasing from $2.3 trillion to $2.6 trillion and
credit derivatives decreasing from $0.3 trillion to $0.2 trillion.
The continuing decline in gross market values reflected in part ongoing
structural changes in OTC derivatives markets, said BIS.
These changes include central clearing and greater possibilities for
trade compression - that is, the elimination of economically redundant
derivative s positions.
In addition, in recent periods an increasing number of banks have
been recording variation margin on cleared derivatives as settlement
payments rather than as transfers of collateral.
BIS explained that the practice of so-called settled-to-market (STM)
allows counterparties to take ownership of the collateral that they
receive. Consequently, daily payments of variation margin are recorded
as settlements of the derivatives transactions rather than as transfers
of collateral and the market value of the derivatives is reset daily
STM, which is increasingly adopted for cleared swaps in particular,
thus results in lower market values for a given derivative, it said.
CREDIT DEFAULT SWAP MARKET
According to BIS, notional amounts of credit default swaps (CDS) continued
to decline, owing to decreased activity between reporting dealers.
From end-June 2016 to end-June 2018, total notional amounts dropped
from $1 2 trillion to $8 trillion, amounts vis-a-vis reporting dealers
declined from $5 trillion to $2 trillion, and amounts vis-a-vis central
counterparties (CCPs) remained steady around $4.5 trillion.
In the first half of 2018, the share of notional amounts cleared with
CCPs was stable at 54%, in contrast to the upward trend over the past
In OTC interest rate derivatives markets, the proportion of contracts
cleared was also steady in the first half of 2018, at around 76% overall,
while in the OTC FX derivatives markets, clearing accounted for only
3.0% of dealers' outstanding contracts at end-June 2018, said BIS.