Lynn Strongin Dodds assesses the seasonal swings that have impacted global OTC derivatives over the last few years.
Global OTC derivatives notional outstanding jumped by 7.9% to $667.1 trn at the end of 2023 compared to the previous year but it was 6.4% lower than mid-year, according to the latest Bank for International Settlements (BIS) report.
This is partly due to seasonal factors particularly evident since 2016, whereby notional outstanding amounts decrease temporarily before the end of each calendar year. This was the case in 2023 where there was a 15% hike in the first six months followed by a 6% contraction in the July to December period. If these patterns were extracted, growth would have been significant at $49 trn or 8% – the highest annual rate since 2017.
Across risk categories, growth rates in 2023 varied. Interest rate derivates (IRDs), the largest component of the global aggregate, rose by 8% year to date to $530 trn while their FX counterparts saw notional amounts soar by 10% to $118 trn, with the bulk of the increase also occurring in the first half of 2023. By contrast, credit derivatives fell by 12% to $8.7 trn.
The gross market value of outstanding OTC derivatives also did not perform well, sliding by 9% in the second half of 2023 and 13% for the year. This was largely driven by the IRD component, which tumbled from its recent high at the end-2022, due to the rapid tightening of dollar interest rates, which boosted the market values of outstanding contracts. Unsurprisingly, as the pace of rate tightening slowed in 2023, the market value of IRD subsequently declined.
All main currencies were hit except for the yen. Euro-denominated IRDs suffered the most in absolute terms, off 13% in the last six months of the year following a 2% decrease in the first half. US dollar IRDs dropped by 1% and 6% in the first and second halves of 2023, respectively. By contrast, yen IRDs surged by 34% in the second half of 2023 on the back of growing market speculation regarding Japan’s emergence from a negative interest rate environment.
As for FX derivatives, their notional amounts grew during 2023, primarily in the first half of the year due to contracts in the US dollar, which have been the most popular currency in FX markets. This trend has been evident since the mid-2010s.
Outstanding positions rose by 50% since 2016, mainly reflecting greater contracts involving the US dollar and the euro or the greenback and other currencies. Meanwhile, contracts involving sterling and the yen on one side have remained relatively stable over this period.
The rise in notional values of FX derivatives in 2023 was particularly evident in the short-term segment where maturities of up to one year increased by $7.4 trn, or 9% year on year to $91 trn at end-2023,
The report also noted that initial and variation margin collected by leading derivatives market participants for non-cleared derivatives was flat at $1.4 trn at year-end 2023 compared to the year before. This included $462 bn of IM and $944.5 bn of VM. In comparison, IM and VM gathered at the end of 2022 totalled $325.7 bn and $1.1 trn respectively.
Market participants also posted $392.2 bn of IM for cleared IRD and credit default swaps (CDS) derivatives at all major central counterparties in the fourth quarter of 2023. This represented a 2% increase compared to $384.4 bn in the same period of last year. However, the report showed a divergence across risk categories with the shares of IRD and FX derivatives in terms of notional amounts changing little at 76% and 5% respectively. By comparison, clearing of CDS slipped from 70% to 65% in the second half of 2023. This was attributed to an outsized fall in outstanding positions.
The notional value of CDS also dropped by 14% in the second half of 2023, from $9.9 trn to $8.5 trn due to the fall in dealer banks’ positions with other financial institutions. They include central counterparties (CCPs) but also non-bank financial institutions and non-reporting banks. At the same time, interdealer positions grew slightly, and positions with non-financials were relatively unchanged.
