Short-term contracts dominate interest rate derivatives turnover

Overnight index swaps made up 31.5% of daily average turnover in April

Traders piled into short-dated interest rate derivatives in April, with overnight index swaps (OIS) and forward rate agreements (FRAs) making up 61% of daily average turnover, data from the Bank for International Settlements’ (BIS) Triennial Central Bank Survey shows.

Total daily average turnover across all interest rate derivatives was $6.5 trillion on a ‘net-net’ basis, meaning it was adjusted for local and cross-border interdealer double-counting. OIS and FRAs, which are typically of shorter maturity and therefore need to be rolled more often, accounted for 31.5% and 29.2% of this total, respectively.

Other interest rate swaps made up 32.3%, options 6.9% and other instruments 0.1%.

In April 2016, interest rate swaps – both OIS and other – made up 69.4% of turnover. FRAs accounted for 24.4% and options 6.1%. Total turnover three years ago was $2.7 trillion.

The BIS said part of the total turnover increase reflects more comprehensive reporting of certain kinds of trades.

What is it?

The BIS’s Triennial Central Bank Survey of interest rate derivatives captures data for forward rate agreements, interest rate swaps, and interest rate options from central banks and other authorities in 53 jurisdictions. Figures are collected from around 1,300 banks and other dealers.

The 2019 survey is the first time OIS data has been separated from total interest rate swaps data.

Why it matters

The BIS said the rise in daily average turnover may have been driven by an increase in hedging activity “amid shifting prospects for growth and monetary policy”.

It could be that expectations that the Federal Reserve and European Central Bank would cut rates led firms to ramp up the quantity of short-term bets placed in April. Open interest in short-term interest rate options shot up 23% in the first quarter, adding credence to this theory.

Both the Fed and the ECB did end up easing, the former in July and the latter in early September. 

It is likely the BIS’s snapshot reflects investors’ positioning ahead of these dovish actions. 

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Short-term bets push interest rate option volumes higher

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