Info Service on Finance and Development (Nov11/03)
22 November 2011
Third World Network
Global OTC derivatives market rises to $708 trillion
Published in SUNS #7262 dated 17 November 2011
Geneva, 16 Nov (Kanaga Raja) -- The global market for over-the-counter
(OTC) derivatives saw a rise of 18% in the first half of 2011, with
total notional amounts outstanding of these derivatives reaching $708
trillion by the end of June 2011, the Bank for International Settlements
(BIS) has reported.
In its latest statistics highlighting OTC derivatives market developments
in the first half of this year, the Basel-based bank noted that this
18% rise has come following a small increase of only 3% (reaching $601
trillion) in the second half of 2010. (See SUNS #7153 dated 19 May 2011.)
(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 are also being used increasingly for speculative purposes,
and essentially to evade or get around regulatory restrictions.)
According to a Financial Stability Board (FSB) six-monthly progress
report on implementation of OTC derivatives market reforms that was
released on 11 October, with only just over one year until the end-2012
deadline for implementing the G20 commitments with respect to OTC derivatives
market reforms, few FSB Members have the legislation or regulations
in place to provide the framework for operationalising the commitments.
The FSB, whose secretariat is hosted by the BIS, had concluded that
jurisdictions should aggressively push forward to meet the end-2012
deadline in as many reform areas as possible. (See SUNS #7238 dated
13 October 2011.)
Reporting on the latest OTC derivatives market statistics, BIS also
found that notional amounts outstanding of Credit Default Swaps (CDS)
grew by 8%, while outstanding equity-linked contracts went up by 21%.
Gross market values (which measure the cost of replacing all existing
contracts and provide a measure of market risk) of all OTC contracts
declined by 8%, driven mainly by the 10% reduction in the market value
of interest rate contracts. CDS market values were almost unchanged.
Overall gross credit exposure dropped by a further 15% to $3.0 trillion,
compared with a 3% decrease in the second half of 2010, said BIS.
With respect to OTC interest rate derivatives, the largest risk category
in the OTC derivatives market, notional amounts outstanding increased
by 19% in the first half of 2011. Contracts on dollar rates were up
Positions in all currencies increased, including the Canadian dollar
(+63%, partly due to additional coverage), sterling (+33%), the euro
(+24%) and the Swiss franc (+21%). Overall interest rate derivative
market values fell by around 10%.
According to BIS, the notional amounts of FX (foreign exchange) derivatives
increased by 12%, with maturities of one year or less up 26%, while
maturities over five years almost halved (-48%).
Gross market values dropped 6%. Market values for instruments on yen
contracted by 21%, and those on the Swedish krona were down 18%. The
market value of instruments on the Swiss franc remained fairly steady
(rising 9%, after increases of 46% and 106% in the preceding two half-years).
Turning to Credit Default Swaps (CDS), the BIS found that CDS notional
amounts outstanding increased moderately in the first part of 2011 (+8%).
Positions with other financial institutions were up 2%.
Amounts outstanding with central counterparties (CCPs) increased to
about 17% of the total market at end-June 2011, after reaching 15% at
Positions with non-financial customers dropped another 23% to $238 billion
after a 63% decline in the second half of 2010. They now represent less
than 1% of the market compared with the previous peak of 5%, reached
at the end of December 2009, it added.
CDS gross market values were largely unchanged at $1.3 trillion, reflecting
a decline of 3% for single-name CDS, and a 5% increase for multi-name
The BIS noted that with the exception of contracts with CCPs (+19%)
and insurance firms (+21%), market values decreased with counterparties
such as banks and security firms (-31%) and other financial customers
(-12%, including special purpose vehicles - SPVs - and hedge funds,
which were not identified separately before June 2011).
"Contracts with SPVs and hedge funds accounted for 2% and 3% of
total of CDS notional amounts outstanding, but for around 10% and 5%
of their net market values, respectively."
BIS underlined that the single-name sovereign CDS market, accounting
for 8% of total CDS notional amounts, increased by 8%, after a 6% rise
in the previous half-year, but representing less than half of the 23%
gain during the first half of 2010. Positions in single-name, non-sovereign
CDS eased by 2% in the first half of 2011.
With regard to the maturity structure, it found that notional amounts
grew 23% in the short segment and 8% in the medium-term bucket, while
there was little change in the long-term (five years and over) component
Counterparty location was reported for the first time and revealed that
most CDS are held with non-local counterparties (82%), said BIS, adding
that a more detailed geographical breakdown is expected to be published
in future releases (of its report).
With respect to equity derivatives, BIS reported that notional amounts
outstanding of equity-linked contracts increased by 21%. Positions in
equity-linked options were up by 26%, while those in forwards and swaps
increased by 11%. Market values rose by 5% in forwards and swaps and
by 11% in options.
As for commodity derivatives, BIS said that amounts outstanding grew
by 9%, with contracts on gold up 18% and options on precious metals
and other commodities up 19%. However, gross market values on commodity
contracts fell by 10%. +
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