The global OTC derivatives market at end-June 2001
20 December 2001
The Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity on positions in the global over-the-counter (OTC) derivatives market shows that business expanded at a brisk pace in the three-year period ending in June 2001. According to preliminary data, the aggregate stock of contracts outstanding stood at nearly $100 trillion at end-June 2001, 38% higher than three years ago. There was, however, a divergence in the evolution of the two largest market segments, with the stock of interest rate products growing by 58% and that of foreign exchange instruments contracting by 7%. Moreover, data on credit derivatives show a rapid expansion of that market segment since end-June 1998.
The remainder of this press release sets the triennial data collection framework within the context of the regular semiannual surveys of activity in OTC derivatives markets and presents the main results of the most recent triennial and semiannual surveys for the period ending in June 2001.
1. The triennial versus the semiannual surveys
In April this year 48 central banks and monetary authorities participated in the first part of the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity. They collected data on turnover in traditional foreign exchange markets - spot, outright forwards and foreign exchange swaps - and in OTC currency and interest rate derivatives. The results of the first part of the triennial survey were released on 9 October.1
Today the BIS is publishing the preliminary results of the second part of the survey, which covers the notional amounts outstanding and gross market values of foreign exchange, interest rate, equity, commodity and credit derivatives.2 The data on contracts outstanding were collected on a consolidated basis at end-June 2001 from 38 central banks and monetary authorities.3
In order to minimise the reporting burden, the format of the second part of the survey corresponds to that of the regular semiannual surveys of positions in the global OTC derivatives market.4 The main difference between the two statistical exercises is that the triennial survey comprises a larger number of market participants, acting as a benchmark for the regular surveys. Once the total size of the market has been determined through the triennial survey, the results of the semiannual surveys are then grossed up to produce estimates of total market size for the current (end-June 2001) and intervening semiannual periods. This explains the discrepancy for the major market risk categories between the triennial numbers (in Table 1) and the semiannual data (in the following tables). The other main difference between the triennial and regular frameworks is that the triennial survey contains separate information on credit derivatives, a group of products that is not surveyed on a regular basis.
The BIS plans to publish the final global results on foreign exchange market turnover and on OTC derivatives market turnover and amounts outstanding in the first quarter of 2002.
2. Main results of the triennial survey
Data on positions in the global OTC derivatives market show that activity remained robust in the three-year period ending in June 2001. Relative to end-June 1998, the stock of contracts outstanding expanded by an average of 11% a year, to $99.8 trillion. This amounted to slower growth than in the previous triennial survey, which had shown an average annual expansion of 15% in the period ending in June 1998.
Overall business in interest rate contracts, the largest segment of the OTC market, grew by 58% in the three-year period, to $75.9 trillion, with the market for interest rate swaps being particularly buoyant. This represented a slowdown relative to the previous three-year period, when positions had increased by 81%. As discussed in the following section on the semiannual market statistics, the robustness of activity in the interest rate swap market reflects growing liquidity in a context of structural change in underlying government bond markets and in risk management practices.
The aggregate stock of foreign exchange products declined by 7% in the three-year period, to $20.4 trillion. This was in marked contrast to the previous triennial survey, which had shown a sharp increase in positions. The contraction in foreign exchange contracts seems consistent with the results of the first part of the most recent triennial survey, which had shown lower turnover in the spot market for foreign exchange. The lower volume of turnover in that market has itself been related to a number of factors, including the introduction of the euro, the growing share of electronic broking in the spot interbank market and consolidation in the banking industry.5 The main exception to the downward trend in positions involving foreign exchange products was in the area of currency swaps (or cross-currency swaps) with a near doubling of positions over the three-year period.6
Meanwhile, equity-linked contracts expanded by 52%, to $2 trillion, while commodity contracts grew by 33%, to $674 billion. These market segments remain much smaller than those for interest rate and foreign exchange contracts.
One of the notable developments of the most recent three-year period has been the rapid expansion of the market for credit derivatives.7 Positions in these instruments, which are not included in the semiannual survey of OTC derivatives markets, expanded from $108 billion at end-June 1998 to $693 billion at end-June 2001. Market participants noted that the market for credit derivatives is diversifying beyond transactions aimed at the restructuring of banks' balance sheets with the entry of new market participants such as insurance companies. Indeed, the most recent numbers show that reporting dealers accounted for only 31% of total positions, compared with 55% for non-reporting financial institutions and 14% for non-financial users (not shown in the tables). The market has also reportedly benefited from a widening in the range of instruments and from improvements in market infrastructure, such as the introduction of standardised documentation and the development of new rate of return indices. It should be noted that the size of the credit derivatives market remains fairly small, being barely larger than that for commodity contracts.8
Gross market values rose from $2.6 trillion to $3 trillion. However, the ratio of gross market values to notional amounts declined from 3.6% to 3.1%. Although this ratio has been fairly stable over time, it has varied considerably across individual market segments, ranging from less than 1% for forward rate agreements (FRAs) to almost 16% for non-gold commodity contracts. It should also be stressed, however, that gross market values exaggerate actual credit exposures, since they exclude netting and other risk reducing arrangements. Allowing for netting lowers the derivatives-related credit exposures of reporting institutions to $1 trillion (see the entry for gross credit exposures in the attached tables).
3. Main results of the semiannual survey
Data from the BIS semiannual survey on positions in the global OTC derivatives market point to a slight rebound in market activity in the first half of 2001. The total estimated notional amount of outstanding OTC contracts stood at $99.8 trillion at end-June 2001, a 5% increase over end-December 2000. The OTC market has expanded at a slower pace over the past year but some of its segments remain highly active.
In terms of broad risk categories, the stock of interest rate and foreign exchange contracts expanded by 4% and 8% respectively, while that of equity-linked contracts remained stable. A comparison of activity on OTC markets with that on exchange-traded markets shows a divergence in the pace of business on the two types of market in the first half of 2001. Open interest in interest rate and stock index contracts, the most active financial contracts traded on derivatives exchanges, increased by 39% and 28% respectively relative to end-December 2000. If sustained, such a rapid increase would represent a significant departure from previous patterns of activity since the growth of OTC business outpaced that on exchanges for much of the 1990s.
The market for interest rate products expanded by 4%, to $67.5 trillion, in the first half of 2001. Three significant developments are worth highlighting in that market. First, activity was driven by a return to growth of the interest rate swaps market, by far the largest segment of the OTC market, with outstandings rising by 5%, to $51.4 trillion. By contrast, business in FRAs and interest rate options continued to be subdued, barely increasing over the review period. Second, the market for interest rate products appears to be accommodating a widening range of financial market participants, as illustrated by the steady growth in positions held by non-reporting financial institutions since 1998. Such a growth pattern should be set against a context of weakening activity by reporting dealers and lacklustre business involving non-financial customers.9 Third, instruments involving the US dollar are rapidly catching up with those involving the euro.
Activity in the US dollar-denominated swap market was particularly brisk in the first half of 2001, with the stock of contracts rising by 22%, to $15.9 trillion. The US dollar swap market has grown at a rapid pace in recent years on the back of a shift in hedging and trading practices. The global financial market crisis that followed the default of Russia in August 1998 highlighted the risks inherent in the use of government bonds and related exchange-traded derivatives to hedge positions on non-government securities, leading market participants to seek alternative hedging and trading instruments, such as interest rate swaps. A reduction in the liquidity of US government debt following net debt repayments by the US Treasury has reinforced the shift to swaps. More recent influences, such as vigorous US monetary easing in the wake of a pronounced deceleration of economic growth, probably also fuelled hedging and position-taking in the dollar swap market.
The market for euro-denominated interest rate swaps returned to expansion following a notable contraction in the second half of 2000, with the outstanding stock of contracts rising by 7%, to $17.6 trillion. Euro-denominated swaps expanded rapidly after the introduction of the single European currency, as swaps became a new benchmark for European fixed income markets. The slowdown in market growth since mid-2000 suggests that this stock adjustment process may be reaching completion.
The market for yen-denominated interest rate swaps followed a different path, with the stock of contracts declining by 12%, to $9.7 trillion. This contraction probably reflects the view at the time that Japanese interest rates would evolve in a narrow range.
In the area of currency instruments, the value of contracts outstanding rose by 8%, to $16.9 trillion. While the stock of outright forwards and forex swaps, the largest currency market segment, expanded by 4%, and that of currency options by 7%, that of cross-currency swaps grew by 20%. Cross-currency swaps have grown steadily since the BIS began its regular collection of data on the OTC market. Business has been fuelled by the large global volume of syndicated loans and securities issues arranged in recent periods.
Activity in the equity-linked sector remained stable at $1.9 trillion, following rapid expansion in the previous reporting period. Business in commodity contracts, the smallest market segment, contracted by 11%, to $0.6 trillion.
Estimated gross market values declined marginally, to $3.0 trillion, following an unusually pronounced increase of 24% in the second half of 2000. The ratio of gross market values to notional amounts declined from 3.3% to 3.1%.
1 For a more detailed discussion see "Central bank survey of foreign exchange and derivatives market activity in April 2001: preliminary global data", BIS Press Release, 9 October 2001.
2 The notional amount, which is generally used as a reference to calculate cash flows under individual contracts, provides a comparison of market size between related cash and derivatives markets. The gross market value is defined as the sum of the positive market value of all reporters' contracts and the absolute value of the negative market value of their contracts with non-reporters (as a proxy for the positive market value of non-reporters' positions). It measures the replacement cost of all outstanding contracts had they been settled on 30 June 2001.
6 Currency swaps commit two counterparties to several cash flows, which in most cases involve an initial exchange of principal and a final re-exchange of principal upon maturity of the contract, and in all cases several streams of interest payments. By contrast, foreign exchange swaps commit two counterparties to the exchange of two cash flows and involve the sale of one currency for another in the spot market with the simultaneous repurchase of the first currency in the forward market.
8 There are a variety of sources of data on the market for credit derivatives, including the British Bankers Association, the International Swaps and Derivatives Association, government agencies and a number of trade publications. Coverage and data collection methodologies vary widely. While some of the sources collect data on a gross basis, others attempt to make adjustments for double-counting. The BIS numbers offer a global coverage and are adjusted for double-counting.
9 The weaker growth of inter-dealer exposures could reflect financial industry consolidation to the extent that mergers and acquisitions lead to a consolidation of bilateral transactions and consequently to a reduction in the outstanding stock of contracts.
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