TWN Info Service on Finance and Development (May11/09)
23 May 2011
Third World Network

Global OTC derivatives market stands at $601 trillion
Published in SUNS #7153 dated 19 May 2011

Geneva, 18 May (Kanaga Raja) -- The global market for over-the-counter (OTC) derivatives saw a rise of 3% in the second half of 2010, with total notional amounts outstanding reaching $601 trillion by the end of December 2010, the Bank for International Settlements (BIS) has said.

The Basel-based central bank for the world's central banks, in its latest statistics released on 18 May, said that this rise has come following a contraction of 4% in the OTC derivatives market in the first half of 2010.

(Derivatives are financial instruments whose prices are derived from the value of stocks, bonds, commodities, currencies, interest rates and even stock market indices. They are normally used to hedge against risk but have also been used for speculative purposes, and essentially to evade or get around regulatory restrictions.)

According to BIS, gross market values of all OTC contracts went down by 14%, driven mainly by the 17% decline in the market value of interest rate contracts, while overall gross credit exposure dropped by 7% to $3.3 trillion, compared with a 2% increase in the first half of 2010.

With respect to OTC interest rate derivatives, which BIS said is the largest risk category in the OTC derivatives market by any measure, notional amounts outstanding increased by 3% in the second half of 2010.

The BIS noted that contracts on dollar rates dropped by 8%, while positions went up in the euro (10%), the yen (7%), the Swiss franc (10%) and the Swedish krona (14%).

It however said that this probably reflected the appreciation of those currencies against the US dollar more than any genuine increase in activity.

Only the Canadian dollar segment showed a decline of about 4%, despite the currency's appreciation of 6%, BIS added.

"Overall interest rate derivative market values fell by around 17%, possibly reflecting the convergence of interest rate expectations with the interest rates locked into contracts."

The notional amounts of FX (foreign exchange) derivatives increased by 9%, with the focus on short-term maturities (+13%), although outstanding options dropped by 10%, said BIS.

Gross market values remained largely unchanged, it noted. The exceptions were instruments on the euro, where market values contracted by 21% despite the currency's appreciation against the US dollar, and on the Swiss franc (where market values rose by 55%, after the 101% increase in the first half of 2010.)

Turning to Credit Default Swaps (CDS), the Basel-based bank found that overall, CDS amounts outstanding levelled off in the second part of 2010 (-1%).

Amounts outstanding with CCPs (central counter-parties) increased from about 10% of the total market at end-June to 15% at end-December 2010.

BIS underlined that positions with other reporting dealers dropped by 4%, and with non-financial customers by 63% (after a 46% decline in the first half) to stand at $310 billion, representing only 1% of the market compared with the previous peak of 5%, reached at the end of December 2009.

Gross market values fell by 19%, reflecting declines of 11% for single-name CDS, and of 31% for multi-name contracts.

According to BIS, these followed a decline of 20% and an increase of 21% respectively in the previous half.

With the exception of contracts with CCPs (+23%), market values also decreased with other counter-parties such as Special Purpose Vehicles (-26%) and banks and securities firms (-20%).

"The sovereign CDS market bucked the downward trend in notional amounts, posting a 6% increase. This followed a 26% gain during the first half of 2010."

Positions in non-sovereign CDS declined by 2% in the second half of the year (after a 7% contraction in the previous period), said BIS.

With regard to the maturity structure, it found that notional amounts did not change much in the shorter segment, while there was a clear drop in the long-term (five years and over) component (-15%).

With respect to equity derivatives, the BIS report said that notional amounts outstanding of equity-linked contracts declined by 10%. Positions in equity-linked options fell by 16%, while those in forwards and swaps increased by 4%.

Market values at end-2010 were uniformly down, by 11% in forwards and swaps and by 7% in options.

As for commodity derivatives, amounts outstanding grew by 2%, driven mainly by a 15% increase in forwards and swaps contracts on precious metals and other commodities, BIS concluded. +