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Info Service on Finance and Development (May21/05) Geneva, 18 May (Kanaga Raja) – The gross market value of over-the-counter (OTC) derivatives increased by $300 billion, to reach $15.8 trillion in the second half of 2020, mainly driven by increases in foreign exchange (FX) derivatives, the Bank for International Settlements (BIS) has said. In its latest release of OTC derivatives statistics at end-December 2020, BIS said that the sizeable US dollar depreciation against major currencies is likely to have contributed to the rise. According to the Basel-based central bank for the world’s central banks, gross credit exposure of OTC derivatives – which adjusts the gross market value for legally enforceable bilateral netting agreements (but not for collateral) – rose by $160 billion in the second half (H2) of 2020, to reach $3.4 trillion. The clearing rate for credit derivatives has continued to rise, while that for interest rate derivatives appears to have plateaued, said BIS. BIS said that the Covid-19-induced market turmoil and strong policy responses drove developments in derivatives markets throughout 2020. Following a notable jump in the first half of the year, the gross market value of outstanding derivatives contracts – which provides a measure of amounts at risk – increased by around $300 billion in the second half of 2020, to reach $15.8 trillion. The most recent increase continued the upward trend since end-2018, when the gross market value was 39% lower, said BIS. Gross credit exposure rose in H2 2020 by $160 billion, to reach $3.4 trillion, it added. The rise in gross market value in 2020 stands in sharp contrast with the relative stability of the notional amount, said BIS. Overall, it decreased by 4% to $582 trillion in H2 2020, in part reflecting a sawtooth seasonal pattern evident in the data since 2016, said BIS, adding that since end-2019, it in fact grew by $24 trillion (4%) year on year. Interest rate derivatives, which account for the bulk of the outstanding notional amount, drove the recent evolution, with their notional value decreasing by 6% to $467 trillion in H2 2020, said BIS. According to BIS, FX derivatives drove the overall increase in gross market value in H2 2020, with their market value rising by 21%, to reach $3.2 trillion. “This increase coincided with the large depreciation of the US dollar against other major currencies,” said BIS. BIS said acting as the primary vehicle currency, the US dollar was on one side of more than 80% of all currency pairs (measured by both notional amount and gross market value). Sizeable US dollar exchange rate movements can lead to more trading in FX derivatives, as participants re-balance their portfolios, BIS explained. “Unanticipated movements may generate a gap between the market value on the reporting date and that prevailing at the inception of the contracts, thus pushing up the reported gross market value.” Equity-linked derivatives also contributed to the overall increase in the gross market value, said BIS. Their gross market value increased by a strong 28%, from $660 billion at end-June 2020 to $840 billion at end- 2020, the highest level observed since 2010, it added. “Such a rise may reflect the large increases in stock prices in major markets that can lead to larger price effects and/or more trading,” said BIS. Over the same period, the gross market value of credit derivatives increased by 10%, from $200 billion to $220 billion. On the other hand, the gross market value of other asset classes – i.e. interest rate derivatives and commodity derivatives – decreased in H2 2020. Overall, said BIS, the outstanding notional amount of equity-linked derivatives has remained rather stable at around $7 trillion since 2012, including forwards, swaps and options where the underlying assets are equities or equity indexes. Equity-linked derivatives are increasingly popular with investors seeking exposure to US equity markets, it added. The notional amount of US equity-linked derivatives increased from $2 trillion at end-2012 to $3.3 trillion at end- 2020. “Their share in total equity-linked derivatives increased from under a third to almost half. By contrast, the notional amount of derivatives referring to European equities has trended downwards,” said BIS. BIS said over the past eight years, their outstanding notional amount dropped from $3.2 trillion to $2 trillion and their share decreased from almost half to less than a third of total equity-linked derivatives. As regards maturity structures, equity-linked derivatives have shifted towards short-term instruments, it added. The notional amount of instruments with less than one-year maturity amounted to $4.7 trillion at end-2020, up from $3.8 trillion at end-2012. The share of these short-term instruments increased from 54% to 67% of total equity-linked derivatives over the same period, said BIS. According to BIS, central clearing rates of credit default swaps (CDS) continued to trend upwards. The share of the notional amount of CDS contracts cleared by central counterparties (CCPs) rose from 60% to 63% during H2 2020. Year on year, this share increased by 7 percentage points from end-2019 (56%), it said. Multi-name CDS contracts accounted for the majority of the increase, with the share cleared by CCPs increasing from 65% at end-June 2020 to 68% at end-2020. For single-name CDS, the rise in the clearing rate was more modest, from 53% to 54% over the same period, said BIS. In contrast to CDS, clearing rates for interest rate derivatives seem to have plateaued, after rising rapidly in 2012-2015 following the G20 mandate for greater clearing of standardized products. The share of interest rate derivatives cleared by CCPs declined slightly, from 78.4% to 77.7% in H2 2020. During this period, the clearing rate of USD contracts decreased from 76% to 74% and that for GBP contracts fell from 83% to 81%, while that for EUR and JPY contracts remained steady at 77% and 82%, respectively, said BIS.
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