Derivsource

Lynn Strongin Dodds assesses the latest ISDA report card on derivatives activity in the second half of 2024 and the full year. 

It’s been a mixed picture for the global derivatives world due to shifting macroeconomic trends. The International Swaps and Derivatives Association (ISDA) highlighted data from the Bank for International Settlements (BIS) which showed a modest increase in notional outstanding during the second half of 2024 compared to the same period in 2023.

The report entitled Key Trends in the Size and Composition of OTC Derivatives in the Second Half of 2024 found that global OTC derivatives notional outstanding rose 4.9% to $699.5 trn by the end of December 2024 from year-end 2023 but fell 4.1% relative to mid-year 2024. This trend partly reflects a seasonal pattern, where notional outstanding typically rises in the first half of the year and declines in the second half.

While equity and credit derivatives posted higher year-on-year growth rates in percentage terms, the overall increase in notional outstanding was primarily driven by interest rate derivatives (IRD) and FX derivatives due to their significantly larger size in absolute terms.

IRD notional outstanding grew by 3.5% to $548.3 trn by the end of last year versus $529.8 trn in 2023 while FX derivatives boasted a hefty 10.2% jump to $130.1 trn from $118.0 trillion during the period. Equity and commodity derivatives also had a bumper year with a notional outstanding surging by 14.4% and 9.3% culminating in a respective $8.9 trn and $2.4 trn tally. Meanwhile, credit derivatives enjoyed a 6% boost to $9.2 trn from $8.7 trn.

According to BIS data, global credit default swaps (CDS) notional outstanding -including single- and multiple-names – grew 5.8% to $9 trn versus year-end 2023 and a 0.4% rise compared to mid-year 2024. However, there were divisions with single-name CDS notional dropping by 1.4% to $3.9 trn at year end 2024 over the same timeframe in 2023 while multiple-names surged 12% to $5.2 trn.

By contrast, the gross market value of OTC derivatives contracts fell by 2.8%, while gross credit exposure, which represents the gross market value after netting, slipped by the same amount over the timeframe. In number terms, this translated into IRD contracts abating by 9.7% to $11.5 trn from $12.8 trn from 2023 to 2024. FX derivatives though fared better, recording a 16.1% gain to $4.9 trn from $4.2 trn.

Market participants were particularly hard hit by their total mark-to-market exposures, which plummeted by 83.2%  due to close-out netting while credit exposure was further reduced by the collateral they posted for clear and non-cleared derivatives transactions.

This is not surprising given major central banks shifted from a tightening to a more neutral or easing stance, resulting in a drop in interest rate volatility. This typically reduces the mark-to-market value of outstanding derivatives positions and leads to a fall in the gross market value of interest rate derivatives (IRD) as well as gross credit exposure.

While most of the major central banks have shifted their gears and lowered their respective interest rates over the past year, they moved at different paces. For example, in June, the European Central Bank (ECB) cut its key interest rates by 0.25 percentage points, to 2% while the Bank of England decided to keep rates at 4.25% with the US’ Federal Open Market Committee (FOMC) following suit which meant the 4.3% benchmark has remained the same since last December.

The BIS report also revealed varying figures for initial margin (IM) and variation margin (VM). On the one hand, total IM and VM collected by leading derivatives market participants subject to regulatory margin requirements for non-cleared derivatives was 6.4% higher at $1.5 trn at year-end 2024. This broke down to $431.2 bn for the IM bucket and $1 trn for VM. This was $430. bn and $939.9 bn, respectively for the prior year.

On the flip side, market participants posted $389.8 bn of required IM for cleared derivatives, including IRD and credit default swaps (CDS), at all major central counterparties (CCPs) in the fourth quarter of 2024. This represents a 0.6% dip over $392.2 bn in the same period in 2023.

The report also included research from ISDA SwapsInfo data which showed that trading in IRD products across the European Union ( EU), UK and US increased by 39.8% to $338.5 trn in the second half of 2024 from $242.3 trn a year earlier. The US accounted for the largest chunk of IRD traded notional at 58.9% followed by the UK, 29.6% and EU, 11.5% and 29.6%, respectively.  

As for the contracts, 72.0% of combined IRD trading had a tenor up to and including one year compared to 66.1% in the second half of 2023. Those with a tenor of over one year and up to five years comprised 18.4% of total IRD traded notional, while those over five years had a 9% slice.