The gross market value of over-the-counter (OTC) derivatives, which provides a measure of amounts at risk, rose from $11.6 trillion to $15.5 trillion during the first half of 2020, led by increases in interest rate derivatives.
Gross market value of OTC derivatives surges in H1 2020
Graph 1: Outstanding OTC derivatives, USD trillions (interactive graph).
Source: BIS OTC derivatives statistics (Table D5.1 and D5.2).
The Covid-19-induced market turmoil and strong policy responses drove
developments in derivatives markets in the first half of 2020. The gross market value of derivative contracts - summing positive and negative values - surged from $11.6 trillion at end-2019 to $15.5 trillion at end-June 2020, a 33% increase within six months (Graph 1, left-hand panel). Similarly, gross credit exposure
- which adjusts gross market values for legally enforceable bilateral
netting agreements (but not for collateral) - also saw a large increase
in the first half of 2020, from $2.4 trillion at end-2019 to $3.2 trillion at end-June 2020. This was the largest rise since 2009.
These sharp movements stand in contrast to the relative stability of notional amounts
of derivative contracts in the first half of 2020, broadly in line with
the trend observed in recent years. Notional amounts of all OTC
derivatives combined increased to $607 trillion at end-June 2020, only
9% above end-December 2019 (Graph 1, right-hand panel). The increase
primarily reflected interest rate derivatives, whose notional amounts
increased from $449 trillion at end-2019 to $495 trillion at end-June 2020, mainly attributable to a seasonal pattern.1 The notional amounts of other contracts remained relatively flat over the same period.
Interest rate derivatives drive rise in gross market value
Graph 2: Gross market value of OTC derivatives, USD trillions (interactive graph).
Source: BIS OTC derivatives statistics (Table D5.1 and D5.2).
Interest rate derivatives saw the largest increase in gross market
value (40%), led by USD-denominated contracts (Graph 2, red line). In
particular, USD-denominated contracts jumped by 86% to $3 trillion
(Graph 3, red line), the largest increase since the Great Financial
Crisis (GFC) of 2007-09. For their part, the gross market value of
EUR-denominated contracts also rose by 26%, standing at $5 trillion at
end-June 2020 (Graph 3, blue line).
Following the Covid-induced market turmoil in March 2020, many
central banks cut rates and took other measures to support economic
activity.2
The outlook for USD-denominated interest rate contracts, in particular,
changed more substantially than that for contracts in other currencies.3
Unanticipated changes generated the gap between market interest rates
on the reporting date and rates prevailing at contract inception, thus
boosting the reported gross market value.4
The gross market value of other types of derivatives also rose in the
first half of 2020, reflecting large price movements and elevated
market volatility.5
The gross market value of commodity contracts increased by 32% to stand
at $260 billion at end-June 2020 (Graph 2, purple line). At 18% and 13%
respectively, the increase for both OTC foreign exchange contracts and
equity-linked contracts was somewhat smaller but still significant,
pushing market values to $2.6 trillion and $0.7 trillion respectively at
end-June 2020 (blue and yellow lines). By contrast, the market value of
credit derivatives decreased by 10% to $199 billion at end-June 2020
(orange line).
USD interest rate contracts see the largest increase in market value
Graph 3: Gross market value of OTC interest rate derivatives, USD trillions (interactive graph). "Other" refers to contracts denominated in currencies other than USD, EUR, JPY and GBP.
Source: BIS OTC derivatives statistics (Table D7).
Central clearing rates trend upwards, especially for CDS
Graph 4: Percentage of notional amounts outstanding of
OTC interest rate derivatives (IRD) and credit default swaps (CDS)
cleared by central counterparties (CCP). Estimated minimum clearing rate
is the proportion of trades that are cleared, calculated as (CCP / 2) /
(1 - (CCP / 2)), where CCP represents the share of notional amounts
outstanding that dealers report against CCPs. The CCP share is halved to
adjust for the potential double-counting of interdealer trades novated
to CCPs.
Source: BIS OTC derivatives statistics (Table D5.1 and D10.1).
Having plateaued in recent years, central clearing rates,
particularly for credit default swaps (CDS), picked up again in H1 2020.
The share of CDS contracts (notional amount outstanding) cleared by
central counterparties (CCPs) increased from 56% at end-2019 to 60% at
end-June 2020 (Graph 4, left-hand panel, blue solid line; and Annex
Graph A8). This was the largest increase since H1 2017, when clearing
rates had trended upwards following the 2009 G20 commitment to clear
standardised OTC derivative contracts.
The recent increase in central clearing of CDS mainly stemmed from
multi-name CDS. The share cleared by CCPs increased from 60% to 65% of
total notional outstanding in the first half of 2020 (Graph 4,
right-hand panel). The clearing rate for single-name CDS rose in
parallel, but more modestly, from 52% to 53%.
The central clearing rate for interest rate derivatives remained
nearly constant, up from 77% to 78% in H1 2020 (red solid line). Most of
the increase was for EUR- and USD-denominated contracts. More than 77%
and 75% of EUR- and USD-denominated interest rate contracts were cleared
by CCPs at end-June 2020, up from 73% and 74% at end-2019,
respectively.
1
The increase over the first half of 2020 (10%) was small relative to
the average increase during the first half of the past four years (15%).
2
Schrimpf, Shin and Sushko (2020) analyse the March turmoil in the US
Treasury market. For more information on the monetary policy support
from central banks, see BIS Annual Economic Report 2020 (Chapter II).
3
As an emergency response to the Covid-19 crisis, the US Federal
Reserve cut the benchmark interest rate by a full percentage point on 15
March and dollar swap lines were reintroduced.
4
This is consistent with the BIS international banking statistics (IBS)
which recorded significant increases in the market value of banks'
derivatives positions as the pandemic escalated. For more details, see
the March IBS statistical release.
5
The VIX spiked to reach 66 points in March as Covid-19 spread, its
highest level since the GFC. It fell back to 30 points at end-June 2020,
still twice its level at end-2019. The Chicago Board Options Exchange
crude oil volatility index shared a similar pattern, with the end-June
value (64 points) twice that of end-2019 (25 points).
Full paper
© BIS - Bank for International Settlements
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