TWN Info Service on Finance and Development (Nov12/01)
19 November 2012
Third World Network

Global OTC derivatives market falls to $639 trillion
Published in SUNS #7480 dated 15 November 2012

Geneva, 14 Nov (Kanaga Raja) -- The global market for over-the-counter (OTC) derivatives declined by 1% between the end of last year and end-June 2012, with total notional amounts outstanding of these derivatives amounting to $639 trillion, according to the Bank for International Settlements (BIS).

Reporting on its latest OTC derivatives market statistics, BIS said that the appreciation of the US dollar against key currencies between end-2011 and end-June 2012 contributed to the decline by reducing the US dollar value of contracts denominated in euros in particular.

"The overall decline was driven by interest rate contracts (-2%). Credit derivatives notional amounts also continued to decline (-6%). In contrast, foreign exchange contracts outstanding rose by 5% to $67 trillion," BIS added.

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

According to BIS, gross market values, which measure the cost of replacing existing contracts, dropped by 7% to $25 trillion, amounting on average to slightly less than 4% of notional amounts outstanding.

Gross credit exposures, which measure reporting dealers' exposure after taking account of legally enforceable netting agreements, mirrored the decline in total market values, falling to $3.7 trillion, which represents 14% of the total market value of OTC derivatives.

Since the end of 2008, BIS observed, gross credit exposures have tended to move in a narrow band of 14-16% of market values. This compares with a range of 19-24% in the mid-2000s.

Breaking down its derivatives statistics by risk category, BIS found that interest rate derivatives represent the largest risk category in the OTC derivatives market, with notional amounts of these derivatives falling slightly to $494 trillion at end-June 2012, and gross market values retreating somewhat to $19 trillion from the historically high level of $20 trillion reached at end-2011.

"Declines in notional amounts were concentrated among inter-dealer positions (-12%), and in positions with residual maturities above five years (-9%), while short-term maturities increased by almost 4%. Ongoing compression of contracts may have contributed to the reduction in notional amounts outstanding," it said.

Meanwhile, the notional amounts of FX (foreign exchange) derivatives totalled $67 trillion (up 5%, largely in the short-term segment) at end-June 2012. Gross market values dropped 13% to $2.2 trillion.

The decline in market values was similar (-14%) across the US Dollar, the Euro and Japanese Yen. The Swiss franc, where market values had fallen 30% in the previous half year, dropped another 24% in the six months to June 2012.

"This may have reflected market expectations that future Swiss franc/euro values would not in the near term move much from the cap established by the Swiss National Bank."

For equity-linked derivatives, BIS found that notional amounts outstanding rose quite strongly (6%) to $6.3 trillion. Market values declined another 5% to $645 billion.

Amounts outstanding of commodity derivatives declined slightly (3%) to $3 trillion, with contracts on gold remaining unchanged at $523 billion. Gross market values on gold contracts and other commodity contracts each declined, by around 20%.

Turning to credit default swaps (CDS), BIS reported that notional amounts outstanding of these instruments declined another 6% (following -12% during the previous reporting period) to $26.9 trillion at end-June 2012. Market values dropped 25% to $1.2 trillion, more than reversing the increase of the previous half-year.

"The decline in amounts outstanding was most pronounced for contracts between reporting dealers and banks and securities firms (-17%), and other financial customers (-12%), with market values down 35% and 32% respectively. Outstanding amounts in CDS with maturities of more than five years were down 16%."

In contrast, said BIS, CDS positions outstanding with hedge funds grew strongly (21%) to $1 trillion, mainly in multi-name CDS, but market values fell by 10%.

Dealers' business with special purpose vehicles (SPVs) rose by 12% to $458 billion, fully accounted for by multi-name products, while the market values of contracts with SPVs dropped by 28%.

Furthermore, BIS said that the share of CDS notional that was centrally cleared was essentially unchanged at 19%. Non-rated CDS cleared with CCPs (central counterparties) were up 27%, compared with a 9% decline for rated CDS and a 5% decline for CDS overall.

Non-financial customers held only 0.7% of all CDS, compared with a peak of 5% at end-December 2009. Half of the CDS held by the sector were on underlying reference obligations or contracts rated investment grade, an increase to 51% compared with 45% in December 2011, it added.

In terms of sector (sovereigns, financial firms, non-financial firms, securitised products and multiple sectors), BIS found that sovereign CDS notional held up (at around $3 trillion), even though overall CDS notional amounts declined.

CDS amounts outstanding on multiple sectors and on non-financial firms declined by 15% and 10% respectively.

Notional amounts of CDS vis-a-vis counterparties controlled from abroad again dropped relatively more (7%) than CDS vis-a-vis counterparties with headquarters in the reporters' home country (3%), said BIS. +