Derivatives market values fall, says BIS

The Bank for International Settlements (BIS) has reported a 9% drop in the market value of banks' derivatives positions in the third quarter of last year, from $2.35 trillion in the second quarter to $2.13 trillion.

The decrease was attributed to declines of $80 billion in the UK and $54 billion in the US. UK, German and French banks reported the largest decreases.

Kenneth Broux, an economist at Lloyds TSB Financial Markets in London, believes the decline was partly a result of banks and hedge funds closing out positions following continued rate rises in the US and UK. "Many positions have been leveraged to US interest rates coming down in early 2007, and that has dropped out of the equation given the strength of the data in the US," he explains. "So, if you've been shorting interest rate derivatives in the US, those positions have to be closed out. If they were leveraged through derivatives, that magnifies the effect. Many more players, especially hedge funds, will have been cutting their positions."

Anna Gordon-Walker.