Rates uncertaintly proves boon for derivatives

Changing expectations of central bank interest rate action in the US and Europe has led to heavy trading of short-term interest rate derivatives, the Bank for International Settlements said yesterday.

In Europe, the second quarter of the year saw economic growth start to slow, and markets reacted by anticipating a rate cut rather than a further increase in June - trading in short-term euro interest rate options doubled in June to $9 trillion and trading in underlying futures rose fro $15 trillion in May to $23 trillion in June.

In the US, meanwhile, expectations proved volatile, with poor economic news in April raising hopes of a slowdown in interest rate increases - volume in April surged to a record $71 trillion - followed by better news in May and June.

Economic growth improved demand for commodity derivatives 5% overall in terms of number of contracts, although this included a 12% drop in precious metal derivatives - the bulk of the growth came from energy products. And the strengthening US dollar led to increased trading in currency derivatives, up 15% to $3 trillion over the quarter.