Marked Fall in OTC Derivatives Volumes
By Aline van Duyn
November 16 (The Financial Times)
The over-the-counter derivatives markets have shrunk, with the value of outstanding contracts falling 4 per cent to stand at $583 trillion in June, compared with six months earlier, the Bank of International Settlements said.
The report, which looks at OTC derivatives around the globe and is the most widely watched measure of these privately traded markets, said positions in foreign exchange derivatives increased, rising 8 per cent in the first half of 2010 to $53 trillion.
The rise in currency-related derivatives was in contrast to continued shrinkage of value of contracts in credit default swaps, derivatives that pay out when a company or country defaults.
The value of outstanding contracts fell to $30.3 trillion from $32.7 trillion at the end of 2009.
The value of outstanding contracts falls as similar contracts are offset against each other and wiped out as they expire.
Interest rate derivatives, the biggest category of privately traded derivatives, were stable in terms of the value of outstanding contracts, with $452 trillion calculated by the BIS.
“In the first half of 2010, growth in amounts outstanding was subdued or negative in all risk categories,” the BIS said in a statement.
The OTC derivatives markets are in the spotlight as regulators write numerous rules aimed at reducing the risks to the financial system of exposure to the counterparties backing the derivatives contracts.
There are moves to push many of the OTC derivatives on to clearing houses and also to trade them in public trading venues.
The default of Lehman Brothers highlighted just how interconnected the financial system was through exposure to derivatives. The default of big derivatives counterparties such as Lehman Brothers could bring down other financial institutions because the derivatives contracts backed by the counterparty could be worthless.
There is a heated debate going on about just how tightly regulated these OTC markets should be. For the first time, regulators such as the Commodity Futures Trading Commission and the Securities and Exchange Commission in the US have been given direct oversight over the OTC derivatives, or swaps markets.
Among the rules they are considering is deciding which types of swaps users should be subject to stringent capital and other rules, and which types of swap should be cleared and traded.
An analysis by the BIS of the CDS market showed that banks and securities firms were the biggest counterparties, with about 11 per cent of positions now having been shifted to central counterparties, or clearing houses. “This relatively low share reflects the large amount of non-standard CDS contracts,” the BIS said.
One of the issues regulators are grappling with is how to encourage derivatives on to clearing houses without then creating too many risks within the clearers themselves.
November 16 (The Financial Times)
The over-the-counter derivatives markets have shrunk, with the value of outstanding contracts falling 4 per cent to stand at $583 trillion in June, compared with six months earlier, the Bank of International Settlements said.
The report, which looks at OTC derivatives around the globe and is the most widely watched measure of these privately traded markets, said positions in foreign exchange derivatives increased, rising 8 per cent in the first half of 2010 to $53 trillion.
The rise in currency-related derivatives was in contrast to continued shrinkage of value of contracts in credit default swaps, derivatives that pay out when a company or country defaults.
The value of outstanding contracts fell to $30.3 trillion from $32.7 trillion at the end of 2009.
The value of outstanding contracts falls as similar contracts are offset against each other and wiped out as they expire.
Interest rate derivatives, the biggest category of privately traded derivatives, were stable in terms of the value of outstanding contracts, with $452 trillion calculated by the BIS.
“In the first half of 2010, growth in amounts outstanding was subdued or negative in all risk categories,” the BIS said in a statement.
The OTC derivatives markets are in the spotlight as regulators write numerous rules aimed at reducing the risks to the financial system of exposure to the counterparties backing the derivatives contracts.
There are moves to push many of the OTC derivatives on to clearing houses and also to trade them in public trading venues.
The default of Lehman Brothers highlighted just how interconnected the financial system was through exposure to derivatives. The default of big derivatives counterparties such as Lehman Brothers could bring down other financial institutions because the derivatives contracts backed by the counterparty could be worthless.
There is a heated debate going on about just how tightly regulated these OTC markets should be. For the first time, regulators such as the Commodity Futures Trading Commission and the Securities and Exchange Commission in the US have been given direct oversight over the OTC derivatives, or swaps markets.
Among the rules they are considering is deciding which types of swaps users should be subject to stringent capital and other rules, and which types of swap should be cleared and traded.
An analysis by the BIS of the CDS market showed that banks and securities firms were the biggest counterparties, with about 11 per cent of positions now having been shifted to central counterparties, or clearing houses. “This relatively low share reflects the large amount of non-standard CDS contracts,” the BIS said.
One of the issues regulators are grappling with is how to encourage derivatives on to clearing houses without then creating too many risks within the clearers themselves.
