# OTC derivatives volumes up 11%, says BIS

The main growth in OTC derivatives came in interest rate instruments, which saw a 15% increase in notionals to $78 trillion. The three main interest rate categories – forward rate agreements, interest rate swaps and interest rate options – all showed strong growth, although interest rate swaps remain the largest single instrument in the OTC market, at$59 trillion. One of the largest areas of growth came in dollar-denominated swaps, which expanded by 19% to $19 trillion. "[The] vigorous monetary easing by the United States, in the wake of pronounced deceleration and the terrorist attacks of September 11, probably fuelled hedging and position-taking activity in dollar-denominated derivatives,” said the BIS The increased dollar swaps activity was also driven by the increased activity from US mortgage banks and investors. As long-term interest rates declined between June and November, many mortgage participants increased activity in the swaps and swaptions markets to hedge against prepayment risk. By contrast, foreign exchange contracts and equity-linked products remained static compared with the previous half-year figure. Foreign exchange derivatives stood at$16.7 trillion at end-December 2001, down from $16.9 trillion at the end of June last year; while equity-linked derivatives notionals remained unchanged at$1.9 trillion.

While OTC volumes expanded in the second half, the increase was not nearly as significant as that noticed in the exchange-traded derivatives market. Open positions in exchange-traded contracts grew 21% in the second half of the year. The BIS said sustained growth at this rate would represent a significant departure from the trend of the last decade, when the OTC derivatives business outpaced the regulated market. The estimated gross market values for exchange-traded contracts increased by 24% to $3.8 trillion. Although notional volumes are one indicator of market growth, dealers argue trading flows would prove a more accurate figure - the BIS produces such statistics in its bi-annual surveys. The gross credit exposure from OTC contracts at the end of last year was$1.17 billion – a 13% increase on the end-June figure. The BIS defines this as the sum of the positive market value of all reporters’ contracts and the negative market value of their contracts with non-reporters.

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