FX Derivatives Higher as BIS Reports Lower Overall OTC Outstandings
Posted by Colin Lambert. Last updated: June 6, 2022
In its latest semi-annual report on OTC derivatives markets, the Bank for International Settlements (BIS) finds that overall notional amounts are lower as at the end of 2021, however FX derivatives outstandings are higher.
Overall notional amounts outstanding were $598.4 trillion, at end-December 2021, down from $610 trillion at end-June 2021, but up on end-2020’s $582 trillion. Conversely, FX derivatives outstanding was $104.2 trillion, up from $102.5 trillion at end-June and from $97.5 trillion at the end of 2020. While outright forwards and FX swaps saw an increase, to $63.7 trillion from $58 trillion at end-2020, and currency swaps similarly rose to $30 trillion from $27.8 trillion, FX options outstandings dropped, to $10.4 trillion from $11.7 trillion at end-2020.
Reflecting data from the FX committee semi-annual turnover surveys, the Other Financial Institution counterparty was responsible for the most activity, $53.3 trillion outstanding up from $47.9 trillion at end-2020, while outstandings with Reporting Dealers was $38.2 trillion, up from $37.1 trillion at end-2020. Activity with Non-Financial Institutions was steady at $12.8 trillion in outstanding notional value.
While clearing seems to be having some effect, it remained muted in terms of overall market activity, the BIS data showing outstanding values with central counterparties at $4.1 trillion, up from $3.8 trillion at end-2020.
Perhaps reflecting expectations of increased volatility and movement on the monetary policy front, outstandings by tenor were up across the board, under one year to $81 trillion from $76 trillion at end-2020, while the one-to-five year bucket had outstanding values of $16.1 trillion, up from $14.9 trillion. Even longer terms FX contracts got in on the action, outstandings rising to $7.1 trillion from $6.6 trillion at end-2020.
Activity in interest rate contracts continue to reflect the “sawtooth” nature of the date whereby mid-year readings are higher than end-year. Outstanding values were $475.3 trillion, down from end-June ($488.1 trillion) but up from end-2020 ($466.5 trillion). Within this data, however, was an indication over the impact of the phasing out or Libor, FRA outstandings dropping almost half from June 2021 and the end of 2020.
“The reform of benchmark interest rates has reshaped the IRD landscape,” says the BIS. “From January 2022, Libor reference rates in IRD have been replaced by backward-looking rates (i.e. overnight risk-free rates, RFRs). As the backward-looking rates are no longer compatible with the structure of FRAs, investors increasingly turned to single-period interest rate swaps (IRS) as an imperfect replacement for FRAs.
“The transition away from Libor is clearly evident in the data for the second half of 2021,” it continues. “The notional value of outstanding FRAs dropped substantially, with those denominated in Swiss francs and sterling contracting by 77% each, and in US dollars by 60%. Japanese yen-denominated FRAs dropped 41%, but from a much lower base. Euro-denominated FRAs saw the smallest drop (36%), probably due to the continuation of Euribor.”
Although the FX data was higher, gross market value – a measure of market risk outstanding – actually dropped at end-2021, to $2.5 trillion from $3.2 trillion at end-2020. Again, the decline was in all products and across all counterparty segments.
It was a similar picture in interest rate derivatives, with gross market value dropping to $8.6 trillion from $11.3 trillion at end-2020.