ISDA publishes year-end 2012 Market Analysis: Portfolio compression and central clearing continue to impact size of OTC derivatives market

20 June 2013

This analysis underscores the significant impact that portfolio compression and central clearing have had on the size of the OTC derivatives market in recent years.

• During 2012, $48.7 trillion in notional amount of OTC derivatives were eliminated via portfolio compression, including $44.6 trillion of interest rate derivatives (IRD). A total of $214.3 trillion of OTC derivatives has been eliminated in the past five years via portfolio compression. Portfolio compression reduces notional outstanding by eliminating matched trades or trades that do not contribute risk to a dealer’s portfolio.
• While portfolio compression reduces the size of the market, the continued growth in central clearing of OTC derivatives has the opposite effect because of the double-counting of cleared trades (in a cleared transaction one bilateral trade becomes two centrally cleared trades, which doubles the notional amount). At year-end 2012, approximately $173.2 trillion of OTC derivatives were centrally cleared, including 53.5 per cent of all IRD.

2012 Market Trends

The impact of these two factors can be seen in OTC derivatives market statistics.  At December 31, 2012: 

• The notional amount outstanding of OTC derivatives (excluding FX transactions) declined 3.3 per cent over the past year and declined 1.3 per cent compared to June 30, 2012.
• After eliminating double-counting of cleared transactions, the notional amount outstanding of OTC derivatives (excluding FX transactions) declined 10.9 per cent compared to year-end 2011 and declined 6.1 per cent compared to June 30, 2012.
• If the volume of compressed transactions were added back in, the notional amount outstanding of OTC derivatives (excluding FX transactions) was roughly flat over the most recent 12-month and six-month periods.

Similar trends can be seen in the IRD market.  At December 31, 2012:

• The notional amount outstanding of IRD declined 2.9 per cent over the past year and declined 1.0 per cent compared to June 30, 2012.
• After eliminating double-counting of cleared transactions, the notional amount outstanding of IRD declined 12.0 per cent compared to year-end 2011 and declined 6.5 per cent compared to June 30, 2012.
• If the volume of compressed IRD transactions were added back in, the notional amount outstanding of IRD was roughly flat over the most recent 12-month period.

Press release

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