TWN Info Service on Finance and Development (Nov13/03)
15 November 2013
Third World Network  

Global OTC derivatives market rises to $693 trillion
Published in SUNS #7693 dated 11 November 2013
 
Geneva, 8 Nov (Kanaga Raja) -- Notional amounts outstanding of over-the-counter (OTC) derivatives totalled $693 trillion at the end of June 2013, up from $633 trillion at the end of last year, the Bank for International Settlements (BIS) has reported.
 
In contrast to notional amounts, BIS reported that the gross market value of OTC derivatives - that is, the cost of replacing all outstanding contracts at current market prices - declined between end-2012 and end-June 2013, from $25 trillion to $20 trillion.
 
In its latest statistics on OTC derivatives markets released Thursday, BIS said that the increase in notional value was driven in part by a further shift towards clearing through central counterparties (CCPs), while the decline in gross market value was due in part to exchange rate movements that lowered the dollar value of yen-denominated contracts.
 
According to BIS, the statistics that have been presented are the combined results of two BIS surveys on amounts outstanding in OTC derivatives markets: the semiannual survey of derivatives dealers in 13 jurisdictions, and the Triennial Central Bank Survey of dealers in an additional 34 jurisdictions. The latest surveys took place at end-June 2013.
 
The Basel-based BIS, commonly described as the central bank of central banks, explained that the semiannual survey captures the positions of about 70 major derivatives dealers based in 13 countries, while the Triennial Survey adds many more dealers and countries, so that the two surveys combined capture more than 400 dealers in 47 countries.
 
Compared with the semiannual survey, said BIS, the Triennial Survey provides additional information in three areas.
 
First, it provides information about the size and structure of many smaller OTC derivatives markets. The semiannual survey captures the bulk of amounts outstanding in OTC markets worldwide; however, it is not necessarily representative of positions in smaller markets.
 
The Triennial Survey collects comparable data for a wide diversity of dealers, including dealers active in smaller markets who may not be active in the major derivatives markets.
 
Second, the Triennial Survey serves as a benchmark for the semiannual survey. The share of global OTC derivatives activity captured by the semiannual survey increased from 93% at end-June 2010 to 96% at end-June 2013, owing mainly to the addition of dealers in Australia and Spain to the semiannual survey.
 
Finally, said BIS, the Triennial Survey captures some OTC instruments not covered by the semiannual survey, in particular credit derivatives other than CDS (Credit Default Swaps).
 
That said, BIS added, the semiannual survey provides much more detailed information about CDS than the Triennial Survey.
 
Of the total of $693 trillion notional value at end-June 2013, $668 trillion was reported by dealers in the 13 countries that participate in the BIS's semiannual survey, and $25 trillion by dealers in the 34 countries that participate only in the Triennial Survey.
 
Of the gross market value of all contracts amounting to $20 trillion at end-June 2013, semiannual survey participants reported more than $19 trillion, and Triennial reporters contributed less than $1 trillion.
 
Gross credit exposures - gross market values after legally enforceable bilateral netting but before collateral - are collected only in the semiannual survey, and they jumped by 8% between end-December 2012 and end-June 2013 to $3.9 trillion, the BIS said.
 
Relative to gross market values, exposures rose from 15% to 19%, which was the highest percentage reached since end-2007.
 
On interest rate derivatives, BIS reported that global OTC derivatives notional amounts outstanding related to interest rates totalled $577 trillion at end-June 2013.
 
Of this, $561 trillion was reported by semiannual reporting centres alone, and $16 trillion by Triennial reporters.
 
BIS underlined that notional amounts for single-currency interest rate derivatives, the largest segment of the OTC derivatives market, dominate the global aggregates because of the importance of these derivatives in managing interest rate risks on private and public debt in semiannual reporting countries.
 
The distribution of aggregate amounts outstanding and market values among instruments (swaps, forward rate agreements - FRAs - and options) is very similar for both reporting samples, with the exception of FRAs, where almost 40% of the outstanding aggregate market value was accounted for by the 3% notional amounts reported by the Triennial reporters alone.
 
Amounts outstanding for single-currency interest rate derivatives reported by the semiannual reporting sample grew 15% in the first half of 2013 to stand at $561 trillion at end-June 2013.
 
The increase was driven by strong growth (21%) in FRAs to $86 trillion.
 
Notional amounts outstanding in interest rate swaps increased by 15% to $426 trillion, after having declined 2% in the second half of 2012, while interest rate options were little changed.
 
"Contracts between reporting dealers fell 11% between end-2012 and end-June 2013 (after 16% in the second half of 2012) to $104 trillion, while those with other financial institutions increased 25% to $421 trillion."
 
BIS explained that when contracts are cleared through CCPs, contract volumes reported to the BIS increase because one contract becomes two.
 
"Due to the impact of central clearing, as well as a substantial expansion of the reporting coverage in one country, FRA market values outstanding jumped from $47 billion at end-2012 to $168 billion at mid-2013."
 
Although the OTC derivatives data are not published by reporting jurisdiction, it is possible to gain an appreciation of the very different risk structures that are managed by dealers in different countries, said BIS.
 
"Predominance of interest rate risk management is a characteristic of the dealers that participate in the semiannual survey, which dominate the global figures and are all based in advanced economies. In contrast, derivatives linked to foreign exchange are of much greater relative importance among reporting institutions based in the emerging economies of Asia, central and eastern Europe, and Latin America, where they account for almost 60% of notional amounts outstanding".
 
BIS said that the role of currencies in derivatives related to interest rate management is quite diversified in the two reporting sets.
 
While interest rate derivatives linked to the US dollar and the euro dominate in advanced economies, reflecting their role as domestic currency for many semiannually reporting economies, the importance of derivatives linked to "other" (largely domestic) currencies in the other regions is evident.
 
According to BIS, global OTC derivatives notional amounts outstanding related to foreign exchange contracts totalled $81 trillion at end-June 2013. Of this, $73 trillion was reported by semiannual reporting centres, and $8 trillion by Triennial reporters.
 
Regional differences are also evident relating to currency risk management in the foreign exchange-related markets.
 
Notional amounts of instruments involving the US dollar on one side accounted for roughly 88% of foreign exchange-related derivatives in all regions at end-June 2013.
 
In contrast, said BIS, the share of the euro varied between almost 32% in all reporting economies and 5% in emerging economies in Asia.
 
The share of instruments linked to "other" currencies not comprehensively identified (but presumably mostly domestic currencies) accounted for around 80-90% of amounts outstanding in emerging economies.
 
In the semiannual reporting sample, the market value of contracts referencing the US dollar on one side (accounting for 85% of all foreign exchange derivatives) rose on average by 10% between end-2012 and end-June 2013, while average market values of contracts referencing the euro, the yen and the Swiss franc on one side dropped by almost 20%, compared with end-2012.
 
"Market values linked to the yen were still unusually elevated at end-June 2013 despite the decline (which was partly due to the 13% depreciation of the yen against the US dollar), because market values had increased by 56% during the previous half-year, mainly due to the revaluation of outstanding forwards and swaps."
 
On equity-linked and commodity derivatives, BIS reported that global OTC derivatives notional amounts outstanding linked to equity totalled $7 trillion at end-June 2013.
 
Practically all of this amount was reported by semiannual reporting centres alone.
 
"In the semiannually reporting sample, equity-related market values rebounded by 15% to $693 billion, between end-2012 and end-June 2013, after having declined by a cumulative 15% since June 2011, when market values for equity-linked instruments had stood at $708 billion."
 
On derivatives related to developments in commodity markets, BIS reported that notional amounts outstanding totalled almost $3 trillion at end-June 2013.
 
Only 90% of amounts outstanding were reported by semiannual reporting centres, while Triennial survey centres reported the remaining $270 billion.
 
"This strong contribution reflects the particular importance of commodity risk management in triennially reporting jurisdictions. Contracts related to gold ($149 billion) accounted for 55% of the commodity notional amounts outstanding in the Triennial sample, compared with 19% for semiannual reporters."
 
Turning to credit default swaps (CDS), BIS said that these swaps are mostly concentrated in the semiannual reporting group, which accounted for $24.3 trillion of the total $24.5 trillion outstanding at end-June 2013.
 
In the semiannual group, outstanding contract volumes in the single-name CDS market continued to decline, by about 8% between end-2012 and end-June 2013. In contrast, contracts referencing multiple names picked up for the first time since end-June 2011, increasing by 4% to $11 billion.
 
Of these, index products grew slightly faster, at 5%. Outstanding credit protection on sovereigns grew by 10% compared with end-2012. In contrast, protection outstanding on securitised products relating to mortgage- and other asset-backed securities fell by 21%.
 
Gross market values for CDS continued to fall, by 14%, to $725 billion, the lowest level since June 2007, said BIS, noting that this development was led by single-name contracts (-18%), consistent with default risk expectations for specific default risks having retreated somewhat during the first half of 2013, reducing the market value of existing contracts.
 
The sectoral share of CDS counterparties was broadly unchanged compared with end-2012. Reporting dealers continued to account for 56% of total contracts, and other financial institutions for 43%.
 
The share of CDS cleared centrally with CCPs was stationary for single-name contracts (8%), but it increased slightly (from 15% to 18%) for multi-name contracts.
 
According to BIS, non-financial customers were almost entirely absent from this market, accounting for only 1% of total amounts outstanding.
 
Contracts with special purpose vehicles and with banks dropped relatively sharply, by 37% and 25%, respectively.
 
"This was partly due to a 56% fall in contracts referencing non-financial firms and a 69% decline in contracts referencing securitised products, respectively. Hedge funds played a bigger role (+12%), by increasing the amount of their contracts referencing financial firms by 50%."
 
According to BIS, the CDS business is mostly foreign business, and the data are available with a regional breakdown of foreign counterparties for the first time.
 
At end-June 2013, contracts with counterparties in the home country accounted for only 19% of notional amounts outstanding, while CDS business with counterparties abroad was four times larger.
 
"The new data reveal that contract volume with counterparties in the advanced economies of Europe is the most substantial, accounting for two thirds of total business abroad at end-June 2013, while foreign business with counterparties in the United States accounted for another 26% of total positions abroad."
 
Almost 65% of CDS foreign deals in Europe are with other reporting dealers. CDS inter-dealer business is even more dominant in Japan (71%), but on a much smaller absolute scale.
 
In other Asian countries, Latin America and countries not specifically identified, the share of CDS deals with non-reporters is much larger, reflecting to some extent the fact that any dealers headquartered in these countries are not included in the semiannual survey, said BIS.