20 May 2009, Alastair Marsh, Risk magazine
In its semi-annual report on the OTC derivatives market, in which it collates data on the outstanding notional amounts and gross market values of the consolidated global OTC derivatives exposures of dealers in the G10 countries, the BIS recorded a decline for the first time since its records began in 1998.
In the first half of 2008, the only asset class to shrink was credit derivatives. However, as market turbulence spread ramped up a gear in the second half of the year, volumes fell significantly across all asset classes.
As a result of severely strained credit markets and increased multilateral netting of offsetting positions, the volume of outstanding credit default swap contracts fell 26.9% to $41.9 trillion from $57.3 trillion in June 2008.
Single-name contracts, which had risen 3% to $33.33 trillion in the first half of 2008, declined by 22.8% to $25.73 trillion, while index and tranche trades, which have been the initial focus of central clearing initiatives, decreased by 32.7% to $16.1 trillion from $24 trillion.
Nevertheless, the gross market value for CDS contracts - the cost of replacing existing contracts at market prices, which the BIS asserts is a truer indicator of market risk than notional - increased by 78.2% to $5.7 trillion (95.6% to $3.7 trillion for single-name contracts and 52.5% to $2 trillion for index and tranche contracts). The BIS attributed the increase to significant price movements in the CDS market.
The asset class to take the biggest hit, however, was commodities, with derivatives referencing commodities dropping 66.5% to $4.4 trillion from $13.2 trillion, triggered by a collapse in prices of underlyings. Non-gold contracts saw the greatest decline, dropping 68% to $4 trillion.
Plummeting equity prices and a decline in the market value of options (which account for around three quarters of the overall market) saw the notional outstanding for equity derivatives sink 36.2% to $6.5 trillion, compared with $10.2 trillion in June.
Foreign exchange (forex) derivatives and interest rate derivatives were also hit by the market chaos at the back end of 2008. The notional outstanding of interest rate derivatives fell 8.6% from $458.3 trillion to $418.7 trillion, while foreign exchange contracts decreased 21% to $49.8 trillion from $63 trillion.
However, declining interest rates resulted in a 98.9% increase in the gross market value of the interest rate contracts to $18.4 trillion, while gross market values of forex derivatives rose by 73.2% to $3.9 trillion.
The BIS's findings paint a similarly gloomy picture of the OTC derivatives market, as it stood at the end of 2008, as the International Swaps and Derivatives Association's latest market survey, released on April 22, 2009. However, the BIS's figures show a smaller drop off in notional amounts in percentage terms.
Isda's survey, which assesses the outstanding notional amounts of OTC derivatives of its primary membership, recorded a 29% decline in CDS volumes to $38.6 trillion at year end (from $54.6 trillion at mid-year 2008) compared with a 26.9% decline recorded by the BIS.
In interest rate derivatives, Isda recorded a 13% decline to $403.1 trillion, compared with an 8.6% drop to $418.68 trillion according to the BIS. The outstanding notional of equity derivatives fell 26.5% to $8.7 trillion at year-end according to Isda, while BIS asserts the equity derivatives market shrunk 36.2% to $6.49 trillion.