BIS triennial survey shows derivatives market up 120%

The latest instalment of the triennial over-the-counter derivatives survey from the Bank for International Settlements (BIS) has shown market growth of 120% in traded derivatives for the three years to June 2004.

This compares with a 38% rise in the corresponding period from 1998–2001. Depreciation of the dollar had, however, inflated some contracts. But with adjustments, the rise remains high, at 80%.

Interest rate contracts rose by 134% to reach a notional outstanding of $177 trillion. Within this, forward rate agreements were up 88%, lagging the markets for swaps and options, which were both up 140%.

Foreign exchange contracts were up 54%, rising to $32 trillion notional outstanding. This marks a sharp reversal from the previous three-year period, when this value fell by 7%. The rise was especially high for currency swaps (up 85%) and options (up 141%).

THe BIS said this resurgence in trading was partly attributable to momentum trading and carry trades by institutional and leveraged investors in the “global search for yield”. There was also significant amounts of dollar hedging by companies exposed to falls in the US currency.

Credit derivatives grew from a notional $700 billion in 2001 to $4.5 trillion in 2004. This increase was concentrated in the credit default swap market. The BIS attributes this to the increase in standardisation in the market.

Gross market values for outstanding contracts rose by more than 100%, from $3 trillion to $6.4 trillion. The ratio of this gross value to notional remained roughly level at 2.9%.

For the first time, the survey also studied concentration levels in the industry, using Herfindahl indexes. The results showed the concentration levels in the industry remained roughly level for the period.

This is the second instalment of the BIS triennial survey, after the first part was released in April of this year. The BIS collects data from 52 central banks and monetary authorities on traditional foreign exchange market turnover as well as interest rate and currency derivatives.