More or Less?

Is the OTC derivatives market growing…or shrinking?  A recent Bloomberg BusinessWeek piece helps provide an answer.

The article reports on ISDA’s OTC Derivatives Market Analysis, Year-End 2012, which pulls together data from a variety of sources to show the impact of some key trends, like clearing, portfolio compression and netting, on the underlying market.

Over the past five years, OTC derivatives notional amount outstanding (excluding FX transactions) is up 6.7% from year-end 2007 to year-end 2012, according to the BIS.  If you eliminate the double-counting of cleared transactions (which occurs because one bilateral contract becomes two cleared contracts), it’s down 17.5%.

BUT:  if you then add back in the $214.3 trillion of notional that has been eliminated via portfolio compression over the past five years, the OTC derivatives market has increased 23%.

Shorter-term, the picture is a little different.  The total OTC derivatives market (excluding FX) declined 3.3% from year-end 2011 to year-end 2012.  After eliminating the double-counting of cleared transactions, the decrease was 10.9%.  If you take this number and add back in the impact of portfolio compression, the market was roughly flat year-over-year.

Another interesting stat from the Market Analysis has to do with the level of risk exposures in the OTC derivatives market.  At year-end 2012, gross market values (a more appropriate measure of risk than notionals outstanding) were 3.9% of notionals.

Netting significantly reduces those exposures; gross credit exposures after netting were 0.6% of notionals.  Factor in the widespread collateralization of OTC derivatives and the uncollateralized exposure after netting is about 0.2% of the notional outstanding.

We know that going through all of these numbers is a bit of a tough slog.  But it’s important to realize that sometimes there’s more to the story than what appears on the surface.

So the real answer is: more and less.

 

 

Moving Regulatory Reporting up a Gear with AI

The aim of derivatives regulatory reporting is to improve transparency so regulators can monitor market activity and identify emerging risks. Although reporting rules and subsequent updates have resulted in improvements, they haven’t achieved fully consistent outcomes, leading to implementation and...

ISDA Publishes FpML Version 5.14

ISDA has published a new version of its Financial products Markup Language (FpML), a widely used open-source standard for the electronic dealing and processing of derivatives transactions. The latest iteration – version 5.14 – incorporates several key modifications and updates...