OTC derivatives values fall to 10-year low – BIS

The gross market value of over-the-counter derivatives contracts fell to $11 trillion by the end of 2017, down 15% from the first six months of the year, to a level last seen in 2007, according to the latest survey of OTC markets by the Bank for International Settlements (BIS).

The most recent slump in the cost of replacing all outstanding contracts at current market prices marks a continued retreat from the $21 trillion seen at the end of June 2016. Meanwhile, the notional amount of outstanding OTC derivatives contracts was $532 trillion, within the range held since 2015.

Interest rate contracts were little changed in the second half of 2017, with a total notional amount of $427 trillion, but their gross market value continued to drop to a 10-year low of $7.6 trillion.

“The decline is likely to have reflected increases in long-term yields, which reduced the gap between market interest rates on the reporting date and those prevailing at contract inception,” the BIS says.

Yields for long-term US government bonds pushed above 3% in April for the first time in more than four years, indicating investors’ confidence in the stability of the nation’s economic growth.

At end-2017, the market value of US dollar contracts was not far above that of sterling contracts

Bank for International Settlements

“Taking a longer-term perspective, the market value of US dollar contracts has dropped especially markedly. At end-2011, the gross market value of euro- and US dollar-denominated contracts were similar, at about $8.4 trillion each,” the BIS reports.

“By end-2017, that of euro-denominated derivatives had fallen to $3.6 trillion, and that of their US dollar equivalents to as little as $1.4 trillion. At end-2017, the market value of US dollar contracts was not far above that of sterling contracts,” it adds.

Central clearing 

The survey also showed central clearing – which authorities have been pushing in order to reform the OTC derivatives markets and reduce systemic risk – made further progress in 2017.

Cleared credit default swaps rose to $5.1 trillion from $4.9 trillion in the second half of 2017, even though the notional amount of CDS saw a slight decline. The share of outstanding CDS cleared through central counterparties (CCP) increased from 51% in June 2017 to 55% by the end of December.

Bilateral contracts between reporting dealers further decreased in the second half of 2017, to $2.3 trillion.

“These shifts are consistent with the novation to CCPs of contracts between dealers,” the BIS reports.

The share of clearing in OTC interest rate derivatives markets remains stable. Reporting dealers’ positions booked against CCPs was $320 trillion by the end of 2017, which accounts for about 75% of outstanding notional. Cleared positions of OTC interest rate derivatives denominated in Canadian dollars were the highest, at 88%, while the lowest were in euros, at 72%.

Only 2% of notional amounts in the OTC foreign exchange derivatives market were centrally cleared at the end of 2017.

“The cleared amounts were probably concentrated in non-deliverable forwards because they are one of the few FX instruments that CCPs offer for clearing,” says the BIS.