04 Jun 2009, Risk magazine
The BIS's latest quarterly review reported "a continued but limited decline of activity on the international derivatives exchanges" in the first three months of the year, with activity starting to increase towards the end of the quarter. Interest rate derivatives turnover was similar to the last quarter of 2008, at $324 trillion, down slightly from $345 trillion, though this masked a sharp drop in North America and an increase in Europe. Equity products turnover fell sharply from $58 trillion to $38 trillion, with falls in all major markets. Foreign exchange derivatives turnover also fell, but Australian and New Zealand dollar future volumes rose significantly, "possibly driven by renewed interest in carry trades", the report said.
The BIS also highlighted the effects of the downturn on derivatives users in Latin America - it criticised the knock-in, knock-out forex options sold widely by Brazilian and Mexican companies to take a long position on their own domestic currencies, which left them with massive losses when Latin American currencies fell last year - it estimated the losses at $4 billion in Mexico for the last quarter of 2008, and $25 billion in Brazil.
"The complexity of such deals and the fact that they were done privately highlights the lack of transparency in these markets, as many of these companies did not disclose any information on their derivatives positions. One result was a review of derivatives exposures across the region as policymakers realised that these exposures could pose systemic risk. Looking forward, policymakers will need to balance financial stability against market development in considering possible regulation of corporate derivatives risk," the BIS wrote.
By contrast, increasing reliance by regional banks on financing from local deposits rather than international capital markets "may have stabilised financing in the region" by insulating local banks from the drop in their local currencies. The same was true of the increasing use of local bonds by companies in the region. "Local capital markets may have to some extent acted as a 'spare tyre' during the crisis, reducing vulnerabilities to declines in international bond finance," the BIS added.
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