Swaps between UK banks and foreign firms up in Q3

Despite latest uptick, gross value of derivatives contracts held by UK banks is 67% below 2008 peak

UK banks built up swap positions with overseas companies in the third quarter, data from the Bank of England (BoE) shows.

The gross value of derivatives – assets plus liabilities – held by UK dealers increased 1% to £5.07 trillion ($6.7 trillion) over the three months to end-September.



Of the total, gross value of derivatives between UK banks and other kinds of foreign firms climbed 3% to £871 billion. Those between UK dealers and other UK entities rose 11% to £45.8 billion.

Outstanding derivatives value between UK banks and the country’s public sector increased 7% to £3.3 billion.

The gross value of UK interbank swaps was fairly flat over the period, at £705 billion.

Net derivatives assets of UK banks across all counterparties amounted to £58.3 billion, down 11% quarter on quarter, and 18% year on year.



What is it?

The BoE publishes quarterly statistics on the derivatives positions of UK-resident banks, meaning data from foreign-owned banks in the country is included, but that from foreign-based branches of UK banks is 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 value of gross derivatives between UK banks and foreign institutions climbed throughout the third quarter. Rumours of interest changes in the US may have been a driver, triggering a number of fresh rate hedging among financial firms to align their portfolios with the expected monetary policy trajectories of the Federal Reserve.

Fluctuations in net values, on the other hand, reflect the extent to which contracts are in- or out-of-the-money from the dealer’s perspective. Shifts in derivatives underlyings – rates, foreign exchange, credit, equities and commodities – drive these kinds of moves.

Put simply, it appears that UK banks wrote more derivatives contracts in the third quarter, and that more of these had negative values than positive. 

Despite the latest uptick, the BoE data also shows just how much the UK derivatives market has shrunk since its pre-crisis heyday. The gross mark-to-market value of all derivatives contracts held by UK banks is 67% below its peak in 2008, and bar another financial crisis the trend is likely to continue.

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