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
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. +