DERIVATIVES-Swaps notional jumps to US$544trn in first half -BIS

LONDON, Nov 10 (IFR) - Gross notional value of the global over-the-counter derivatives market jumped to US$544trn in the first six months of 2016, a 10% increase over the previous six months but down from US$696trn three years earlier.

According to the latest semi-annual survey from the Bank for International Settlements, the uptick in notional amounts was driven by an expansion in yen and US dollar-denominated contracts.

Gross market value of the OTC derivatives market, reflecting the cost of replacing all outstanding contracts at current market prices, also jumped over the six-month period.

By the end of June, the cost of replacing contracts stood at US$20.7trn, up from US$14.5trn at the end of 2015 and driven by sharp moves in yen and sterling-related FX derivatives during the first half, and declining long-term yields, which have increased the value of outstanding contracts.

According to the survey, published in conjunction with the Triennial Survey highlighting longer-term trends, central clearing has reshaped derivatives markets in recent years.

The data show that 62% of OTC derivatives notional reported by dealers was cleared through central counterparties as of June 2016. Central clearing now dominates the OTC interest rate derivatives market, where 75% contracts held by reporting dealers were cleared. That falls to 37% for credit derivatives and just 2% for OTC foreign exchange and equity derivatives.

“Central clearing is a key element in authorities’ agenda for reforming OTC derivatives markets to reduce systemic risks,” said the BIS report. “These new data show that central clearing has made very significant inroads into OTC interest rate derivatives markets but is much less prevalent in other OTC derivatives segments.”

Interest rate derivatives continue to dominate the OTC market, with gross notionals totaling US$438trn at the end of June, but their share of the overall market has fallen slightly to 80%, down from 83% three years previously.

That decline comes as a result of trade compression to eliminate redundant contracts. The process has been aided by the shift to CCPs, which have multilateralised the compression process. TriOptima’s triResolve platform, which operates in conjunction with CCPs including LCH’s SwapClear, has eliminated over US$870trn of derivatives gross notional since the platform launched over a decade ago.

While interest rate contracts are showing a gradual decline, foreign exchange derivatives have grown in prominence. Gross notional in FX contracts hit a record US$86trn at the middle of this year, for a 16% share of the overall market - up from 12% three years ago.

The data show that FX derivatives risk is heavily concentrated in emerging market dealers. FX contracts account for 60% of gross market values of derivatives for dealers in emerging Asia, emerging Europe and Latin America, while interest rate contracts accounted for 30% of derivatives value for those dealers.

Credit default swap notionals continued to fall, hitting US$11.8trn by the end of June, down from over US$24trn in June 2013 and more than US$30trn in 2010. (Reporting by Helen Bartholomew; Editing by Ian Edmondson)