BIS: FX Derivatives Soar Double-Digit in H1 Boosted by High Interest Rates

<p>The over-the-counter (OTC) derivatives market is
experiencing substantial growth, with interest rates on the rise, according to
the latest report from the Bank for International Settlements (BIS). This surge
results from market fluctuations and the significant impact of the phasing out
of London interbank offered rate (LIBOR) rates.</p><p>BIS' report for mid-2023 highlights a surge in
interest rate derivatives (IRDs) and FX derivatives. IRDs had increased 17% as at the
end of June due to multiple factors, including the impact of rising dollar and
euro interest rates. Additionally, the changes in the benchmark LIBOR rates impacted
the product mix in IRDs. </p><p>Shifting OTC Derivatives Markets</p><p>Notably, the decline in forward rate agreements
(FRAs) denominated in key currencies marked a substantial change. Currencies
like GBP, JPY, and CHF witnessed a decline in FRAs. The dollar-denominated
FRAs reached $14 billion during the transition from the LIBOR rates. </p><p>Additionally, the <a href="https://www.financemagnates.com/tag/bank-for-international-settlements/" target="_blank" rel="follow">BIS</a> report highlighted the increasing
rate of central <a href="https://www.financemagnates.com/terms/c/clearing/">clearing</a>, particularly in credit default swaps, which reached a
record high of 70%. Despite this, the clearing rate for credit default swaps remained below that for the IRDs. The data also indicated a continuous rise
in central clearing for FX derivatives, albeit much slower, remaining below 5%.</p><p>The report indicates a remarkable surge in the gross
market value of <a href="https://www.financemagnates.com/tag/otc-derivatives/" target="_blank" rel="follow">OTC derivatives</a>, which reached $20.7 trillion by the end of
2022. The hike in inflation and policy rate increases globally contributed to
this surge, particularly in interest rate derivatives. </p><p>Changes in market rates, surpassing the rates
prevailing at the initiation of IRD contracts, significantly boosted their
gross market value. Euro and US dollar-denominated IRDs substantially
increased as the market adapted to the evolving economic conditions.</p><blockquote><p lang="en" dir="ltr">Outstanding interest rate and FX <a href="https://twitter.com/hashtag/OTCDerivatives?src=hash&amp;ref_src=twsrc%5Etfw">#OTCDerivatives</a> (notional amounts) increased by 17% and 12% during the first half of 2023 <a href="https://twitter.com/hashtag/BISStatistics?src=hash&amp;ref_src=twsrc%5Etfw">#BISStatistics</a> <a href="https://t.co/T4DNZiGomK">https://t.co/T4DNZiGomK</a> <a href="https://t.co/4198dDA47r">pic.twitter.com/4198dDA47r</a></p>— Bank for International Settlements (@BIS_org) <a href="https://twitter.com/BIS_org/status/1725091863449767962?ref_src=twsrc%5Etfw">November 16, 2023</a></blockquote><p>OTC Derivatives Landscape Stabilizes </p><p>Interestingly, while gross market values soared, the
notional value of outstanding derivatives remained relatively stable. The
reform in benchmark Libor rates significantly impacted the instruments used,
notably affecting FRAs denominated in key currencies. </p><p>Conversely, commodity derivatives, especially in
energy and food, experienced a decline in gross market values and notional
values. This significant drop aligned with the fall in commodity prices
observed in 2022, indicating a direct correlation between market fluctuations and
derivatives' values.</p><p>Meanwhile, the regulation of OTC derivatives is
evolving globally. Recently, Canadian securities regulators <a href="https://www.financemagnates.com/institutional-forex/canada-adopts-international-standards-to-regulate-derivatives-dealers/" target="_blank" rel="follow">introduced rules to govern OTC derivatives</a> for dealers and advisers. Aligned
with international standards, these regulations aim to foster transparency,
ethical practices, and accountability in Canada's OTC derivatives market.</p><p>The newly adopted rules impose significant
responsibilities on OTC derivatives dealers and advisers. These mandates
include fair dealing, conflict of interest management, reporting
non-compliance, and proper recordkeeping.</p>

This article was written by Jared Kirui at www.financemagnates.com.