The notional value of outstanding OTC derivatives increased from $532 trillion at end-2017 to $595 trillion at end-June 2018. This increase in activity was driven largely by US dollar interest rate contracts, especially short-term contracts.
The increase in notional amounts outstanding was driven mainly by OTC interest rate derivatives, in particular for US dollar-denominated contracts, which rose from $157 trillion at end-2017 to $193 trillion at end-June 2018. An increase in US dollar activity was also seen in exchange-traded derivatives markets, where the average daily turnover of futures and options on dollar interest rates climbed to a record high of $9.6 trillion in the month of February. This increased activity may reflect changing expectations about the path of future US dollar interest rates during the period. The notional amounts outstanding of euro-denominated interest rate derivatives also went up over this period, but more modestly, from $122 trillion to $129 trillion.
The continuing decline in gross market values reflected in part ongoing structural changes in OTC derivatives markets. These changes include central clearing and greater possibilities for trade compression - that is, the elimination of economically redundant derivatives positions. In addition, in recent periods an increasing number of banks have been recording variation margin on cleared derivatives as settlement payments rather than as transfers of collateral. The practice of so-called settled-to-market (STM) allows counterparties to take ownership of the collateral that they receive. Consequently, daily payments of variation margin are recorded as settlements of the derivatives transactions rather than as transfers of collateral and the market value of the derivatives is reset daily to zero. STM, which is increasingly adopted for cleared swaps in particular, thus results in lower market values for a given derivative.
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© BIS - Bank for International Settlements
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