BIS announces a fall in banks’ derivatives positions

The positive market value of banks’ derivatives positions fell by $214 billion in three months last year, as banks became warier of leverage.

The Bank of International Settlements’ (BIS) provisional international banking statistics released last week showed banks’ total derivatives positions valued at $2.13 trillion at the end of June 2006, down from $2.35 trillion at the end of September.

Kenneth Broux, an economist at Lloyds TSB Financial Markets, said this was a substantial drop and could reflect the market peaking and risk aversion increasing, as many institutional and sovereign players became more leveraged and aware of the risk inherent to a global tightening in monetary policy.

Broux said: “Many positions have been leveraged to US interest rates coming down in early 2007 ... so if you’ve been shorting interest rate derivatives in the US, those positions have to be closed out…many more players, especially hedge funds, will have been cutting their positions.”

The statistics reported that this decrease was mainly due to declines of $80 billion in the UK to $4.3 trillion in September 2006, and of $54 billion in the US to $5.4 trillion in September. Broux explained that these decreases reflect the concentration of hedge funds in the US and the UK closing their positions.