The value of over-the-counter derivatives notional outstandings grew to $128 trillion by June 30, up 15% from the figure at the end of last year, according to a study by the Bank for International Settlement (BIS). But much of the increase in the European and Japanese markets was related to an appreciation of both currencies against the US dollar, the benchmark currency for BIS surveys.The growth in OTC derivatives far outstripped that of exchanges during the same period, where open positions grew 1%. This reversed the situation in the second half of last year when OTC contracts grew 11%, compared with a 22% rise in exchange-traded contracts.
Interest rate derivatives, with $90 trillion in outstandings, were again the largest component of the OTC business, with forward rate agreements, interest rate swaps and interest rate options, growing at roughly equal rates.
Interest rate swaps notionals hit $68 trillion, with US-denominated instruments growing 14% to about $22 trillion, due in part to an upswing in the use of swaps and swaptions to hedge mortgage pre-payment risk. Notionals in euro-denominated swaps grew 18% in dollar terms. But the BIS noted that the euro had appreciated 13% against the dollar during the same period. It was a similar situation for yen-denominated swaps, which grew 16% to $12 trillion – the yen strengthened 10% against the dollar during this period.
Increased currency volatility caused a surge in FX options business, which overall grew by 39% to $3.9 trillion in notionals outstanding. Contracts involving the euro swelled 66%, primarily driven by volatility of the euro/dollar currency pair in the second quarter. But forex derivatives as a whole only made a modest 8% increase to $18 trillion.
Meanwhile, equity-linked contracts returned to expansion with an 18% rise to $2.2 billion, as did commodity contracts which grew 39% to $777 million.
But evaluating the size of the market by notional outstandings is becoming increasingly outdated, said industry participants. They believe trading volumes would represent a better benchmark for OTC swaps activity. The BIS does produce such data, but only in its bi-annual reviews.
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