There was growth in all risk categories except gold, according to the BIS’s semi-annual report into OTC market activity.
The report highlighted the continued growth in interest rate swaps - by far the largest single group of OTC products, with $95 trillion in notional amounts outstanding. Interest rate contracts represented 56% of all market risk categories.
Euro-denominated contracts represented 43% of all interest rate swap products, up from 36% a year earlier. Notional outstandings hit $40.7 trillion, up 29% for the period, although this figure falls to 18% once adjusted for currency movements.
“It’s more a continuing trend than a new trend,” said a spokesman for the world’s largest swaps broker Icap. “It’s a very steep and ever rising curve,” he added.
Icap swaps analyst Don Smith said he was surprised at the size of the increase. He said the sharp jump in measured volatility in March following a period of relative stability contributed to the rise. He added that increased corporate bond issuance was another factor, and said many companies were trying to switch to fixed interest rates.
Foreign exchange derivatives also grew strongly, with notionals up 20% on the previous six months. Currency options rose by 42%. The BIS said the forex derivatives market had never before shown more than single-figure growth in the time it has been collecting statistics.
Gordon Wallace, the London head of foreign exchange trading at Deutsche Bank, told RiskNews that the depreciation of the dollar against most major currencies had caused many participants to enter the market. “It [the size of the increase] doesn’t necessarily surprise me, considering the dollar downtrend,” he said. “It’s been quite a hot market this year.” To a lesser extent, he added, the increased activity could also be attributed to uncertainty surrounding events such as the Swedish EMU referendum.
But the growth in OTC contracts failed to match the pace set in the regulated market. Exchange-traded derivatives grew by 61% in notional amounts outstanding during the first half of 2003, the report said.