At its 2010 Regional Conference in Hong Kong, the International Swaps and Derivatives Association, Inc. (ISDA) today provided new statistics regarding the concentration of OTC derivatives activity among major market participants. Accompanying these statistics, ISDA also announced the results of its Mid-Year 2010 Market Survey of privately negotiated derivatives.
Five Largest US-Based Dealers Hold 37 Percent of Outstandings
According to ISDA’s Mid-Year 2010 Market Survey, the total notional amount outstanding of interest rate, credit, and equity derivatives at June 30, 2010 was $466.8 trillion. The five largest US-based dealers reported a notional amount outstanding of $172.3 trillion, which is 37 percent of the total amount. This contrasts with other reports in which the five largest US-based dealers appear to hold 95 percent of outstandings and dominate the OTC derivatives market. The difference lies in the fact that the ISDA Survey takes into account the global scope and scale of the derivatives business, while the other figures compare the five largest US-based dealers to the total held only by US bank holding companies.
G14 Holds 82 Percent of Outstandings
According to the ISDA Market Survey, the notional amount reported by the 14 largest international derivatives dealers (the G14) was $354.6 trillion at the end of June 2010 after adjusting for double counting of inter-dealer transactions. This represents 82 percent of the total amount reported by all Market Survey respondents. Broken out by product type, the G14 held $354.6 trillion of interest rate derivatives, which is 82 percent of all interest rate derivatives reported; $23.7 trillion of credit derivatives, which is 90 percent of all credit derivatives; and $5.5 trillion of equity derivatives, which is 86 percent of all equity derivatives.
Mid-Year 2010 Market Survey Results
According to the Survey, the total notional amount outstanding of OTC derivatives ($466.8 trillion) increased 1 percent from $463.9 trillion at the end of December 2009. Broken out by product type, the Survey results were:
Interest rate derivatives, which include interest rate swaps and options and cross-currency swaps, grew by 2 percent to $434.1 trillion from $426.7 trillion at year-end 2009 (about 93 percent of the total amount).
Credit derivatives decreased by 14 percent in the first six months of the year to $26.3 trillion from $30.4 trillion (about 6 percent of the total amount). For the purposes of the Survey, credit derivatives comprise credit default swaps referencing single names, indexes, baskets, securitized obligations, and portfolios.
Equity derivatives, which consist of equity swaps, options, and forwards, decreased by 6 percent to $6.4 trillion from $6.8 trillion at year-end 2009 (less than 2 percent of the total amount).
According to the Bank of International Settlements (BIS), gross mark-to-market value of all derivatives was approximately 3.5 percent of notional amount outstanding as of December 2009. In addition, net credit exposure (after netting but before collateral) is 0.6 percent of notional amount outstanding. Applying these percentages to the total ISDA Market Survey notional amount outstanding of $466.8 trillion as of June 30, 2010, gross credit exposure before netting is estimated to be $16.3 trillion and credit exposure after netting, but before collateral, is estimated to be $2.7 trillion.
Additional Concentration Information
As noted above, the ISDA Market Survey reports the notional amount outstanding at the G14 group ($354.6 trillion or 82 percent of total outstandings at June 30, 2010). Broken out by product type, the G14 held $354.6 trillion of interest rate derivatives, which is 82 percent of all interest rate derivatives reported; $23.7 trillion of credit derivatives, which is 90 percent of all credit derivatives; and $5.5 trillion of equity derivatives, which is 86 percent of all equity derivatives.
With regards to interest rate derivatives, the ISDA concentration measure is similar to a measure obtained using data from TriOptima’s OTC Derivatives Interest Rate Trade Reporting Repository (IR TRR). The IR TRR collects transaction data on interest rate derivatives from the G14 group and provides regulators with monthly reports summarizing outstanding trade volumes and gross notionals as well as currency breakdowns and maturity profiles by product type. According to the IR TRR, the notional amount outstanding of interest rate derivatives held by the G14 group as of June 2010 was $343.2 trillion after adjusting for double counting of centrally cleared trades. The difference between the IR TRR amount and the ISDA amount is due mainly to the fact that the IR TRR data cover a wider range of products but are adjusted for double counting of both inter-dealer and cleared transactions, while the ISDA numbers are adjusted only for inter-dealer double counting.
In order to measure the size of the market beyond the G14 group, ISDA relies on the Bank for International Settlements (BIS) Semiannual Derivatives Statistics. According to the BIS, the notional amount outstanding of interest rate derivatives at year-end 2009 was $449.8 trillion. After reallocating the “unallocated” notional amounts that capture gaps in the BIS sample and subtracting the double-counted cleared trades, the BIS notional amount is $399.0 trillion.
Assuming that the notional amount of interest rate derivatives grows at the same rate that it did in the second half of 2009, the estimated BIS notional amount of interest rate derivatives is $410.9 trillion. Of this amount, the $343.2 trillion amount held by the G14 group as reported in the IR TRR represents 83.5 percent. This is consistent with the 82 percent found using the ISDA Market Survey.
About ISDA Mid-Year 2010 Market Survey
The ISDA Mid-Year 2010 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of June 30, 2010. All notional amounts have been adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 70 firms provided data on interest rate swaps; 62 provided responses on credit derivatives; and 61 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.
