Exchange-traded derivatives up 23% in Q3

The exchange-traded futures and options market has continued its rapid expansion, growing by 23% year-on-year in the third quarter to a turnover of $357 trillion, according to the latest figures released by the Bank for International Settlements (BIS).

Despite lower volatility in interest rates dampening demand for interest-rate products, rising prices on most of the world's stock exchanges during the period boosted activity in equity derivatives, which now account for 22% of the regulated market.

Demand from Asia marked the biggest change, with Korea overtaking the US to become the world's biggest exchange-traded derivatives market after demand rose by 71%. Individual investors made up most of the increase, drawn by the ability to hedge small amounts on the product for quick returns, according to the BIS.

"It's an Asian thing," said one of the report's authors, Christian Upper. "The growth in Korea was dramatic - in the past the Korea figure was particularly small, but now that it has grown it has a much bigger effect on the overall growth. The individual investors seem to have a preference for the equity products."

Third quarter turnover, however, was 4% down on the second quarter of this year, the BIS report said. The lower volatility in interest rates was a major factor behind this, according to Upper, but jitters following Hurricane Katrina in August had helped boost demand for derivatives, he added.

Upper predicts the regulated futures and options market would continue to grow as companies diversified their risks further. "This is structural growth in the market, as market participants divide their portfolios into smaller segments," he said. "It's about putting more and smaller eggs into the same basket."