Seasonal Factors Drive Derivatives Outstandings Higher: BIS
Posted by Colin Lambert. Last updated: November 16, 2021
In its latest semi-annual publication of OTC derivatives statistics, the Bank for International Settlements (BIS) reports the notional value outstanding rose to $610 trillion as at end-June 2021, however key risk indicators, such as gross market and credit exposures continued their trend of decline.
The 4.8% increase in notional value outstanding from end-December 2020 was largely down to seasonal factors, BIS says, as it reflects a well-established pattern in recent years. “The notional amount of interest rate derivatives has exhibited a sawtooth pattern since 2016, with amounts at end-June greater than year-end values,” it explains. “Looking at year-on-year variations to adjust for this pattern, the amounts at end-June 2021 were in fact down slightly from a year earlier ($607 trillion). One notable exception is related to equity derivatives, whose outstanding amounts increased by 16% over the past year, with most of the rise coming from the US markets.”
Perhaps more pertinently, given the intense focus on reducing derivatives-related risks in the financial system, the gross market value of derivatives contracts – both longs and shorts – was $12.6 trillion at end-June 2021, down 20% from end-2020. Similarly, gross credit exposure – which adjusts gross market values for legally enforceable bilateral netting agreements (but not for collateral) – also saw a large contraction (from $3.4 trillion to $2.7 trillion). The two measures had jumped noticeably in 2020 amidst heightened market uncertainty during the initial phases of the Covid-19 pandemic, BIS says, adding, their return to near pre-Covid levels in mid-2021 coincided with a less uncertain macroeconomic outlook.
The gross market value of both interest rate and FX derivatives decreased in the first half of 2021. That for interest rate derivatives dropped by 21% to $8.9 trillion, slightly above its end-2019 level ($8.4 trillion), and FX derivatives fell by 24% to $2.4 trillion, just above its end-2019 level.
Clearing’s impact across markets remains mixed. The BIS says that the rate of clearing in credit default swaps contracts rose by almost 2% from the end of 2020, to 64% of all contracts – up from 56% pre-COVID – while in interest rate derivatives it remained steady at around 75%, a level it has held since 2015.
Foreign exchange derivative clearing remains a laggard, although the BIS says while the clearing rate has remained low at 4%, “it is trending higher”.