OTC Derivatives Market Analysis Year-End 2012

The OTC derivatives market continues to provide essential risk management tools for all sectors of the global economy, for entities such as corporations, pension funds, investment firms, insurance companies and governments.

The industry has worked very hard, using tools such as netting, collateralization, portfolio compression and central clearing, to reduce risks in the system in accordance with G20 goals.

ISDA produces its Market Analysis to integrate market data to show the impact of these and other tools. For example, portfolio compression has significantly reduced notional amounts outstanding by 25% or more. Clearing, on the other hand, has the opposite effect and “artificially” increases notional outstanding. In addition, notional amounts, which are commonly used to describe the size of the market, are inappropriate for risk measurement purposes. Gross market value and gross credit exposure (which reflects netting) are far better measures of risk.

The publication of the Market Analysis corresponds with the release of the Bank for International Settlement’s (BIS) semi-annual statistical release. The BIS’s most recent release covered the period ending December 31, 2012.

The Market Analysis draws on information sources including LCH.Clearnet’s SwapClear, TriOptima, the DTCC Trade Information Warehouse, Markit, ICE, CME, ISDA’s 2012 Margin Survey and other clearinghouses and trade vendors.

Links to data sources are at the end of this paper. ISDA welcomes suggestions from readers regarding additional improvements to the Market Analysis.

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