Following evidence from previous Bank for International Settlements (BIS) statistics, the institution’s latest semi-annual report on the OTC derivatives market (for H2 2001) indicates a continued and rapid expansion in market volumes. The estimated notional amount of outstanding contracts stood at $111 trillion at end-December 2001, an 11% increase on H1’s $99.755 trillion. The latter represented a 5% increase on H2 2000 volumes (see Profit & Loss, February 2002). Gross market values, defined as the sum of the positive market value of contracts and the negative market value of contracts with non-reporters (as a proxy for the value of non-reporters positions), grew by 24% to $3.8 trillion.
The growth was again driven by interest rate instruments, which rose 14.9% to $77.513 trillion; this growth was spread fairly evenly between the FRA, swaps and options markets. FX volume fell very slightly (1%) to $16.748 trillion. The underlying FX numbers were reasonably stable, as is to be expected given such a modest change in the headline data – outright forwards and swaps fell slightly, as did options, but currency swaps volumes rose slightly.
The interest rate swap (IRS) market remains by far the biggest segment in the OTC market, with $58.897 trillion outstanding. Growth was driven by the US dollar and euro markets in particular; however, all reporting segments barring the Canadian dollar reported an increase in volumes. US dollar volumes rose 18.8% to $27.422 trillion, slightly more than the 16.9% increase seen in the euro market (to $26.185 trillion).
Elsewhere, even the recently moribund Japanese yen IRS market managed an increase of 4.6%, although the total outstanding of $11.799 trillion is still below year ago levels ($13.107 trillion). Sterling outstandings rose a strong 20% to $6.215 trillion, Swiss franc by 16.7% to $1.362 trillion, and Swedish kroner interest rose by 6% to $1.057 trillion. Canadian dollar interest fell by just $4 billion to $781 billion.
The BIS says that trading in dollar-denominated derivatives has been sufficiently buoyant to offset the possible contractionary effect of market consolidation. It adds that vigorous monetary easing in the US, as well as a broader range of market participants (for example mortgage banks) using the swaps and swaptions markets, also contributed to the strength.
Euro-denominated business reversed the declines of the previous two quarters, again the IRS market played a leading role, rising 18% to $21 trillion. The BIS reiterates the point made in its triennial survey of turnover (see Profit & Loss, November/December 2001) that euro instruments have become benchmarks in the market, leading to much greater usage.
The growth was also spread fairly evenly by counterparty. Outstandings with reporting dealers rose 9.6% to $35.428 trillion, with other financial institutions by 13.4% to $32.505 trillion, and non-financial customers by 47.5% to $9.58 trillion. Equally, increases were spread over the three main reporting periods, although over five years (in residual maturity terms) which rose 22.75% to $19.092 trillion, outperformed one to five years (+16.1% at $30.542 trillion) and under one year (+8.8% at $27.859 trillion).
As to be expected, the numbers in the FX derivatives tables are pretty much unchanged – balances with reporting dealers was virtually unchanged at $5.912 trillion and a decline in outstandings with other financial institutions (of 7.3% to $6.755 trillion) was nearly balanced by a similar increase (9.8% to $4.081 trillion) with non-financial customers. In timescale terms, the majority of outstandings were under one year $13.427 trillion (+3.1%), and this small rise was counterbalanced by both the one to five year period (-17.4% at $2.340 trillion) and over five years (-7.8% at $981 billion).
US dollar volumes rose slightly to $15.410 trillion, euro volumes dipped slightly to $6.368 trillion, while sterling ($2.315 trillion), Swiss franc ($800 billion), Canadian dollar ($593 billion) and Swedish kroner ($551 billion) registered relatively insignificant gains and losses.