The latest semi-annual survey of OTC derivatives markets by the Bank for International Settlements (BIS) offers another insight into the impact of regulation on market activity.
The survey finds that notional amounts of OTC derivatives activity at end-December 2019 was 2.7% higher year-on-year at $559 trillion, however seasonal factors meant that it was down from the end-June report by a much larger 12.5%. Amongst the seasonal factors cited by the BIS is that the decline appears strongest in positions vis-à-vis central counterparties. “Such end-of-year contractions can occur if dealer banks and/or their clients shrink their outstanding notional derivative positions for regulatory and financial reporting purposes,” it says, reinforcing a report from earlier this year that looked at the spillover effects of G-SIB (globally systemically important banks) regulation in FX swaps markets.
The gross market value of these derivatives – which provides a measure of amounts at risk – fell slightly, from $12.1 trillion at end-June 2019 to $11.6 trillion by year-end, with interest rate contracts accounting for the bulk (72%) of that total. The gross market value appears to have stabilised in the recent years at very low levels from a historical perspective, reflecting the downward trend observed since the peak during the Great Financial Crisis, the BIS says.
Gross credit exposures – which adjust gross market values for legally enforceable bilateral netting agreements (but not for collateral) – also declined in the second half of 2019 (from $2.7 trillion at end-June 2019 to $2.4 trillion at year-end). “Interestingly, these exposures have continued to fall as a share of gross market value, to 20% at end-2019 compared with the 25% high observed mid-2018,” the BIS says. “This recent trend appears consistent with the reported higher rates of clearing with central counterparties (CCPs), as such clearing allows for increased netting and thereby tends to lower the credit exposures of outstanding derivative contracts.”
Reflecting the funding and regulatory aspect of the data, the report says the seasonality observed in outstanding notional OTC derivatives is mainly driven by the patterns of interest rate derivative positions with CCPs, which stood at $344 trillion at end-2019. These now represent 77% of total notional amounts outstanding for interest rate derivatives, although this share has systematically dropped at year-end in recent years. This pattern is most evident in short-term contracts of all types (roughly 50% of the total), and in interest rate swaps in particular (76%). It can also be observed from other data on cleared derivatives collected from specific CCPs.”
In contrast, there is little seasonality in data for credit default swaps (CDS) generally, including for CDS with CCPs: notional amounts of CDS have been steadily declining since the GFC. The share of their cleared positions with CCPs has stabilised at around 55% in the most recent years.
The notional amounts outstanding in FX contracts have risen steadily since the turn of the century., the BIS observes, adding the US dollar is the primary vehicle currency, being almost always (around 90% of the time) one of the two currencies exchanged in FX swaps and forwards. It also notes that another interesting feature has been the long- term increase in FX contracts involving non-G4 currencies. “Indeed, the steady rise in contracts with the US dollar on one side has been mirrored by a parallel progression in those involving non-G4 currencies,” it states. “By contrast, contracts involving the other G4 currencies (EUR, JPY and GBP) have stagnated since the GFC.”
The recent rise in notional values of foreign exchange derivatives has been concentrated in short-term instruments. These accounted for 78% of all outstanding positions ($72 trillion) at end-2019, compared with 72% at end-2011. Outright forwards and FX swaps ($55 trillion at end-2019, or 59% of outstanding notional amounts) appear to be the main instruments driving these trends.