Service on Finance and Development (Nov20/02)
Geneva, 13 Nov (Kanaga Raja) – The gross market value of over-the-counter (OTC) derivatives – which provides a measure of amounts at risk – rose from $11.6 trillion to $15.5 trillion during the first half of 2020, mainly driven by increases in interest rate derivatives, the Bank for International Settlements (BIS) has said.
In its latest release of OTC derivatives statistics at end-June 2020, BIS said that gross credit exposure, which adjusts market values for legally enforceable netting agreements, also rose from $2.4 trillion at end-2019 to $3.2 trillion at end-June 2020, the largest rise since 2009.
According to the Basel-based central bank for the world’s central banks, the Covid-19-induced market turmoil and strong policy responses drove developments in derivatives markets in the first half of 2020.
The gross market value of derivative contracts – summing positive and negative values – surged from $11.6 trillion at end-2019 to $15.5 trillion at end-June 2020, a 33% increase within six months, it said.
Similarly, said BIS, gross credit exposure – which adjusts gross market values for legally enforceable bilateral netting agreements (but not for collateral) – also saw a large increase in the first half of 2020, from $2.4 trillion at end-2019 to $3.2 trillion at end-June 2020.
According to BIS, this was the largest rise since 2009.
“These sharp movements stand in contrast to the relative stability of notional amounts of derivative contracts in the first half of 2020, broadly in line with the trend observed in recent years,” said BIS.
Notional amounts of all OTC derivatives combined increased to $607 trillion at end-June 2020, only 9% above end-December 2019.
The increase primarily reflected interest rate derivatives, whose notional amounts increased from $449 trillion at end-2019 to $495 trillion at end-June 2020, mainly attributable to a seasonal pattern.
The notional amounts of other contracts remained relatively flat over the same period, said BIS.
INTEREST RATE DERIVATIVES
According to BIS, interest rate derivatives saw the largest increase in gross market value (40%), led by USD- denominated contracts.
In particular, USD-denominated contracts jumped by 86% to $3 trillion, the largest increase since the Great Financial Crisis (GFC) of 2007-09, said BIS.
For their part, the gross market value of EUR-denominated contracts also rose by 26%, standing at $5 trillion at end-June 2020.
“Following the Covid-induced market turmoil in March 2020, many central banks cut rates and took other measures to support economic activity,” said BIS.
The outlook for USD-denominated interest rate contracts, in particular, changed more substantially than that for contracts in other currencies.
Unanticipated changes generated the gap between market interest rates on the reporting date and rates prevailing at contract inception, thus boosting the reported gross market value, it said.
According to BIS, the gross market value of other types of derivatives also rose in the first half of 2020, reflecting large price movements and elevated market volatility.
In this context, BIS pointed to the VIX (a volatility index) spiking to reach 66 points in March as Covid-19 spread, its highest level since the GFC, and falling back to 30 points at end-June 2020, still twice its level at end-2019.
The Chicago Board Options Exchange crude oil volatility index shared a similar pattern, with the end-June value (64 points) twice that of end-2019 (25 points), it said.
The gross market value of commodity contracts increased by 32% to stand at $260 billion at end-June 2020, BIS said.
At 18% and 13% respectively, the increase for both OTC foreign exchange contracts and equity-linked contracts was somewhat smaller but still significant, pushing market values to $2.6 trillion and $0.7 trillion respectively at end-June 2020.
On the other hand, the market value of credit derivatives decreased by 10% to $199 billion at end-June 2020.
Having plateaued in recent years, central clearing rates, particularly for credit default swaps (CDS), picked up again in the first half of 2020, said BIS.
The share of CDS contracts (notional amount outstanding) cleared by central counterparties (CCPs) increased from 56% at end-2019 to 60% at end-June 2020.
This was the largest increase since the first half of 2017, when clearing rates had trended upwards following the 2009 G20 commitment to clear standardized OTC derivative contracts, said BIS.
“The recent increase in central clearing of CDS mainly stemmed from multi-name CDS,” it added.
The share cleared by CCPs increased from 60% to 65% of total notional outstanding in the first half of 2020.
The clearing rate for single-name CDS rose in parallel, but more modestly, from 52% to 53%, said BIS.
The central clearing rate for interest rate derivatives remained nearly constant, up from 77% to 78% in the first half of 2020.
Most of the increase was for EUR- and USD-denominated contracts, said BIS.
More than 77% and 75% of EUR- and USD-denominated interest rate contracts were cleared by CCPs at end-June 2020, up from 73% and 74% at end-2019, respectively, it added.