Growth of OTC contracts slows to 5%, say BIS

Rising commodity prices and a worldwide rally in equity prices during the second half of last year have dramatically increased the demand for over-the-counter derivatives protection in the sectors, according to the latest statistics released by the Bank for International Settlements (BIS). But overall growth in contracts slowed somewhat compared with previous periods due to a tailing-off of demand for interest rate products.

In the final six months of 2005, demand for OTC derivatives grew by 5%, taking the notional amount outstanding on such contracts to a new record of $285 trillion. All sectors posted increases on the previous period, but the highest increases in demand were for commodities and equities, which rose by 23% and 11% respectively. This took the notional value of contracts in these asset classes to $3.6 trillion and $5 trillion at the end of December.

But interest rate products, which with a notional value of $215 trillion at the end of 2005 make up by far the biggest OTC contract type, grew by only 5%. According to the BIS, these increases were modest compared with the semi-annual double-figure increases in demand for interest rate OTC contracts in the first half of the decade.

“It is still too early to say whether this slowdown in growth is temporary or of a more permanent nature, perhaps related to the maturing of the market,” said the BIS report. “What is clear is that the rates of growth in the OTC market outstrip those recorded in organised derivatives exchanges.”

The overall growth of the notional value of outstanding over-the-counter derivatives has been slowing somewhat in the previous two reports. After continuous double-figure increases, they grew by 8% in the first half of last year, down from 14% in the second half of 2004.