OTC derivatives market hits all-time high on rates activity - BIS

The global over-the-counter (OTC) derivatives market hit an all-time record of $715 trillion (£576tn) at the end of June, driven by a jump in use of interest rate derivatives, according to data published on Thursday.

Statistics published by the Bank for international Settlements (BIS) show OTC derivatives notional at the end of the first half of this year was 13% higher than at the end of June last year. The $715tn tally beats the previous high recorded by the Basel-based body's data of $711tn in the second half of 2013. The BIS publishes every six months the data that refers to the previous half year period.

Interest rate derivatives made up the lion’s share of the total, with $574tn in notional at the end of June, which was 17% higher than at the end of 2022. The interest rate derivatives market continues to adapt to changes driven by the Libor reform process, as well as increases in US and European interest rates in the period, the BIS said on Thursday.

“The reform of benchmark Libor rates has transformed the product mix of interest rate derivatives,” the BIS report said. “In particular, it has led to significant reductions in the notional value of outstanding forward rate agreements (FRAs) denominated in several key currencies. Following the phase-out of Libor rates for GBP, JPY and CHF at end-2021, outstanding notional FRAs denominated in these currencies collapsed.”

The Bank reported a similar trend in the US, while use of FRAs referencing Euribor (which has not been cancelled like most of the other Libor-based rates) hit a record $43tn at the end of June.

The notional value of OTC foreign exchange derivatives grew 12% in the first six months of this year to $120tn, according to the BIS.

The report concluded that 70% of the credit default swap (CDS) market was being cleared in the first half of 2023, a new record which was up 4% on the same period in 2022. Some 78% of interest rate derivatives were cleared in the first half of this year which has consistently been the level since 2016, according to the BIS data.

There is currently fierce competition among exchanges over the European rates markets, with Intercontinental Exchange (ICE), Eurex and CME Group all launching incentive schemes and new contracts in an effort to build market share.

CME Group has managed to retain its dominance of the US Secured Overnight Financing Rate market after transitioning from its Libor-based Eurodollar predecessor. Similarly ICE has held onto its leading position in the UK Libor alternative since cessation at the end of 2022.