DERIVATIVES-OTC notional falls to lowest in a decade

LONDON, May 9 (IFR) - The volume of outstanding over-the-counter derivatives notional fell 13% to US$483trn in the six months ending December 2016, the lowest level for over a decade, according to the latest semiannual survey from the Bank for International Settlements.

The latest figure reverses a 10% increase seen in the first half of the 2016, but cements a long-term decline from a US$710trn peak in 2013.

Trade compression has been a significant driver behind the decline as dealers continue to scrub down their balance sheets by eliminating redundant contracts to address stringent capital and leverage rules. Compression provider TriOptima eliminated US$175trn of swaps contracts in its triReduce service in 2016. The firm has compressed US$973trn since inception in 2003.

Notional amounts of interest rate derivatives - the largest portion of the OTC market - fell by 14% to US$368trn over the six-month period, with sharp declines in Swedish kronor and yen contracts.

The share of reporting dealers’ positions cleared through central counterparty clearinghouses stood at 76% - unchanged from six months earlier. Forward rate agreements were the most actively cleared products with 92% going through CCPs, followed by interest rate swaps at 81%. While clearing of interest rate options remained small, cleared notional quadrupled in those products over the six-month period to US$225bn from US$53bn.

Credit default swaps also witnessed sharp declines in outstanding notional to US$9.9trn from US$11.8trn previously. Declines were concentrated in uncleared contracts, whereas notional outstanding for contracts cleared at CCPs remained stable at US$4.3trn. The share of outstanding CDS cleared through CCPs jumped from 37% at June 2016 to 44% in December - the largest semiannual increase since CDS data were first collected in 2010.

The gross market value of outstanding derivatives contracts – which reflects the cost of replacing all positions at current market prices – also declined in the second half of 2016, to US$15trn from US$21trn. Gross credit exposures, which adjust gross market values for legally enforceable bilateral netting agreements, fell to US$3.3trn from US$3.7trn during the same period. (Reporting by Helen Bartholomew)