The increase in OTC derivatives positions that took place in
the first half of 2016 reversed in the second according to the latest data from
the Bank for International Settlements (BIS).
The notional amount of outstanding OTC derivatives declined
from $553 trillion to $483 trillion between end-June and end-December 2016, and
their gross market value – the cost of replacing all outstanding contracts at
current market prices – fell from $21 trillion to $15 trillion over the same
The notional amount of outstanding FX derivatives stood at
$68.6 trillion at end-December 2016, in line with levels observed since 2013.
Their gross market value totalled $3.0 trillion, which was close to the high of
$3.1 trillion reported at end-June 2016.
Notwithstanding the stable overall trend, the BIS says the
gross market value of contracts involving sterling almost halved in the second
half of 2016, from $624 billion to $338 billion. This reversed the spike seen
at end-June 2016, which occurred on the back of the sharp depreciation of the
currency following the Brexit referendum.
In contrast to inter-dealer contracts in the OTC interest
rate derivatives market, which have largely shifted to CCPs, inter-dealer
positions in the FX derivatives market continued to account for the largest
share of outstanding contracts. The notional amount of outstanding FX contracts
between reporting dealers totalled $30.3trillion at end-2016, which represented
44% of all FX contracts outstanding.
Contracts with financial counterparties other than dealers
and CCPs equalled $28.9 trillion, while those with non-financial customers
stood at $8.4 trillion.
The report shows that central clearing made further inroads,
in particular, the share of centrally cleared credit default swaps (CDS) jumped
from 37% of notional amounts outstanding at end-June 2016 to 44% at end-December.
In OTC interest rate derivatives markets, the share
centrally cleared was unchanged at 76%. Among interest rate instruments, the
share of notional amounts booked against CCPs was highest for forward rate
agreements (FRAs), at 92%, followed by interest rate swaps (IRS), at 81%. In
contrast, the share remained negligible for interest rate options, despite a
quadrupling of the outstanding amount of options contracts reported against
CCPs in the second half of 2016, from $53 billion to $225 billion.
It remains a different story in OTC FX derivatives markets, however,
with only 1% of notional amounts being centrally cleared at end-December 2016.
That said, the BIS says that the outstanding amount cleared almost tripled in
the second half of 2016, from $352 billion to $903 billion.
While the BIS does not collect a decomposition of FX
derivatives into FX swaps and forwards, it says the growth of clearing was
probably concentrated in non-deliverable forwards (NDFs) because they are one
of the few FX instruments that CCPs offer for clearing.
The BIS says that the rising importance of central clearing
in OTC derivatives markets, “is consistent with the incentives provided by
higher capital and margin requirements for non-centrally cleared derivatives”.
Regulators in most of the major derivatives markets require
certain classes of standardised OTC derivatives, particularly interest rate
swaps and CDS, to be centrally cleared. While options, FX derivatives and
equity derivatives are generally not covered by these requirements, higher
margin requirements for non-centrally cleared derivatives are being phased in,
starting in Canada, Japan and the United States in September 2016 and in other
key markets in 2017.