TWN 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 13%.

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 end-December 2010.

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 contracts.

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 (+1%).

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%. +