BIS reports record year for exchange-traded derivatives

Demand for exchange-traded futures and options contracts reached an all time high last year with annual turnover up 22% on 2004, according to the latest quarterly data released by the Bank for International Settlements (BIS).

Trading reached $1,408 trillion on the world’s derivatives exchanges, up from the previous year’s turnover of $1,152 trillion. Approximately 90% of trades were linked to interest rates, 9% to equity and 1% to currency. In 2005, each of the asset classes grew by 22%, 26% and 68%, respectively.

However, notional amounts in the fourth quarter were down compared to the previous three months, with $344 trillion traded versus $357 trillion in Q3. According to the BIS, the slight downturn was in-line with previous years’ trends and due to seasonal fluctuations, which mainly affect demand for interest rate derivatives.

“The fourth quarter decline in derivatives activity may be related to an increase in investors’ need for liquidity to meet year-end cash flow obligations or to reduce position-taking in order to ‘lock in’ previous returns,” said the report. “In both cases, traders may reduce positions in derivatives.”

Particularly low demand for interest rate-linked derivatives in the US and Japan during the final three months of 2005 was partly offset by demand for euro interest rate-linked derivatives ahead of the European Central Bank’s rate hike on December 1.