UK bank derivatives exposures fall by £321bn in Q2

At £1.12 trillion, FX exposures are at their lowest levels for seven years

The fair value of derivatives held by UK banks fell by £321 billion ($232 billion) to £5.03 trillion in Q2 2021 – the fifth consecutive quarterly decline since exposures hit £7.96 trillion in Q1 2020, Bank of England (BoE) data shows. 

FX futures and forwards and interest rate swaps accounted for the lion’s share of the decline. At the end of June, FX futures and forwards exposures fell £114 billion to $496 billion, an 18.7% drop over the quarter. Interest rate swap exposures fell by £108 billion to £2.94 trillion – a 3.6% fall.



At £1.12 trillion, total FX exposures stood at their lowest levels for seven years. FX swaps fell by £59 billion (10.3%) to £515 billion, FX options by £21.3 billion (16.57%) to £107 billion.

Credit derivatives reversed their Q1 2021 hike, with exposures also falling £11.8 billion (6.8%) to £161 billion. 

Meanwhile, interest rate options exposures sank by £13.9 billion (4.9%) to £271 billion.  

In contrast, interest rate futures and forwards increased by £132 million (2.7%) to £5.02 billion, while commodity and equity derivatives edged up by £10.95 billion (2.13%) to £526 billion. 

Net assets fell for the first time since Q2 2020 to £65.4 billion, a 15.8% decline.  

What is it? 

The BoE publishes quarterly statistics on the derivatives positions of UK-resident banks. Data from foreign-owned banks in the country are included, but foreign-based branches of UK banks are excluded.    

The data is broken down by asset class and counterparty type, with end-quarter derivatives positions recorded at market value or, where this is not available, fair value.   

The statistics are gathered through a specialist derivatives survey, known as Form D-Q.

Why it matters

The UK FX derivatives market looks to be changing in size and structure: Q1 2020 was the first time since at least 2013 where futures and forwards held a bigger share of the market than FX swaps, at £916 billion compared with £902 billion, respectively. Before the drop this quarter, gross total FX futures and forwards exposures stood at £609.7 billion, compared to £574 billion in FX swaps. 

After peaks of volatility, such as those triggered by the Covid pandemic in 2020, it’s common for the derivatives market to contract. FX forwards and futures have been falling after a high of £916 billion in the first quarter of 2020. 

The UK is the leading international location in FX trading, according to the Bank for International Settlements’ triennial survey, last conducted in 2019. Whether the contraction reflects a smaller market share by volume among UK banks in the wake of the country's departure from the European Union, remains to be seen.

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