OTC Derivatives Markets The notional outstanding value of OTC derivatives contracts fell by 13% from the peak of $684 trillion in June to $592 trillion at end-2008: the first fall since
Trang 1Rapid growth in the derivatives industry seen over a long period was checked
in 2008 This overview summarises developments in both OTC and
exchange-traded derivatives and reviews the influence of derivatives on the
financial crisis
OTC Derivatives Markets The notional outstanding value of OTC
derivatives contracts fell by 13% from the peak of $684 trillion in June to
$592 trillion at end-2008: the first fall since BIS started collecting figures in
1998 (Chart 1) Key contributor to this decline was the move to central
counterparty clearing of some contracts following concern over systemic
risks posed by OTC derivatives In addition, voluntary terminations of
contracts reduced the total value of credit default swaps (CDS) contracts
Gross market value more than doubled from $16 trillion to $34 trillion
during 2008, as a result of volatility of prices associated with greater risks in
many derivatives contracts (Table 1) Higher market value was reflected in a
rise in gross credit exposure, up over a half to $5.0 trillion
Interest rate instruments remain the mainstay, accounting for 71% of global
notional value Derivatives based on foreign exchange contracts make up a
further 8% The balance consists of foreign exchange, CDS, commodities and
equity linked derivatives, all of which declined in 2008 The euro and the US
dollar are the most widely traded currencies in single currency interest rate
derivatives, with 37% and 35% shares respectively in 2008 UK was the
leading derivatives centre for trading OTC derivatives worldwide in April
2007 with its share of turnover stable at 43% The US was the only other
major location with 24% of trading
Exchange-traded derivatives Notional outstanding value of
exchange-traded derivatives fell by 29% in the second half of 2008 (Chart 1), while
value of turnover dropped by 47% in the 12 months to Q1 2009 (Chart 2)
Strong trading in the first half meant that annual turnover fell by only 3% in
2008 to $2,214 trillion, having risen by about a quarter annually in each of
the four previous years BIS notes that the decline in trading during the
second half of 2008 reflects a combination of significantly reduced risk
appetite, expectations of stable low interest rates in major markets and lower
hedge fund activity The decline in turnover slowed to 3% in the first quarter
of 2009, although over the whole of 2009 turnover could be 25% down on
2008 Exchanges have seen considerable consolidation in recent years Based
on notional value of trading, the biggest exchange groups worldwide are
CME Group, NYSE Euronext (largely based on NYSE Liffe) and Eurex
These three exchanges account for over a half of turnover value
London has a prominent role in global exchange-traded derivatives NYSE
Liffe is the leading exchange in the trading of short-term euro interest rate
contracts: 98% of NYSE Liffe turnover by value takes place on the London
exchange At least 45% of Eurex trades have originated in the UK since 2003
More than 90% of international business in non-ferrous metal futures is
transacted at the London Metals Exchange ICE Futures Europe is the
*Exchange-traded March 2009 Source: Bank for International Settlements
Chart 1 International derivatives markets
$ trillion, notional amounts outstanding, June & December
0 100 200 300 400 500 600 700
2009* 2008 2006 2004 2002 2000 1998
Exchange-traded Over-the-counter
Source: Bank for International Settlements
Chart 2 International exchange-traded
quarterly turnover by value
$ trillion, quarterly value of turnover
0 100 200 300 400 500 600 700
2009 2008 2007
2006 2005
Source: Bank for International Settlements, Futures Industry Association
OTC market
Notional value Gross market value Gross credit exposure
Exchange-traded derivatives
Notional value Turnover Contracts traded (bn)
$ trillion (except contracts traded)
Table 1 Measures of activity in international derivatives markets
2007
595.3 15.8 3.3
79.1 2288.0 15.6
2006
414.8 9.8 2.0
69.4 1807.7 12.0
2008
592.0 33.9 5.0
57.9 2213.3 17.8
2007 44 62 60
14 27 30
2008 -1 114 54
-27 -3 14 %
Trang 2change leading electronic global exchange for energy products European Climate
Exchange, part of ICE Futures Europe, is the leading carbon markets
exchange in Europe for futures and options trading Derivatives account for
the majority of UK banking sector spread earnings on derivatives, foreign
exchange trading and other securities transactions, which combined totalled
£9.5bn in 2007 and an estimated £10bn in 2008
Derivatives and the financial crisis While there are differing views on the
role of OTC derivatives as a contributory cause to the crisis, the drive for
regulatory repair will include much closer oversight of these markets, the
imposition of comprehensive trade reporting to the regulatory authorities and
widespread use of central clearing
Although the regulatory authorities are concentrating on collateralised debt
obligations (CDOs) and the central clearing of CDS, it is clearly the intention
in both the EU and the US to propose tighter regulation for OTC markets in
general The underlying issue for market users is whether closer regulatory
oversight and the pressure to standardise contracts will result in a reduction
in product diversity and a scaling back of the capability of customers to
manage their diverse and often complicated underlying risks The position is
further complicated by strong indications in the US that standardised OTC
contracts will be required to be executed on (and not just cleared through) an
exchange or by a regulated trading system
Other measures under consideration include the application of higher capital
requirements to cover the proprietary trading of banks and other institutions,
particularly in high-risk products and the imposition of leveraged ratios This
could impact on market liquidity in both OTC and exchange-traded contracts
The emerging focus on development of “safety first” regulation could also
reduce innovation, which has always been at the forefront of the OTC and
derivative markets in general
The aim of US authorities is to facilitate expansion of exchange-traded
products and downplay OTC contracts While exchanges would benefit from
such a move, some major exchanges have said that OTC derivatives should
not be forced onto clearing houses which are not equipped to deal with the
associated risks The exchanges said that market participants should have a
role in determining the extent to which OTC products are standardised
Whatever the eventual outcome the regulatory climate needs to preserve the
widespread availability of derivatives products, both OTC and
exchange-traded, as important risk management tools The derivatives industry is also
concerned about any moves that disadvantage London, as the leading global
centre for OTC derivatives, relative to other centres
OVER THE COUNTER DERIVATIVES MARKETS
Data on global OTC derivatives markets is generated mainly from statistics
compiled by the Bank for International Settlements (BIS): the six-monthly
survey of major market participants and the triennial central bank surveys
Five triennial surveys have been undertaken, the most recent in April 2007
I Six monthly BIS survey of major market participants
Size Indicators of activity in OTC markets have shown divergent trends in the
past year Notional value fell in the second half of 2008, while gross market
Chart 3 OTC derivatives markets
0 5 10 15 20 25 30 35 40
2008 2006 2004 2002 2000 1998
Source: Bank for International Settlements
$ trillion, June & December
Gross credit exposure Gross market value
Gross credit exposure
Gross market value
0 1 2 3 4 5
Measures used in BIS survey
Nominal or notional amounts outstanding provide a
measure of market size, and can also provide a rough proxy for the potential transfer of price risk in derivatives markets They are also comparable to measures of market size in related underlying cash markets.
Gross market value supplies information about the scale
of gross transfer of price risks in the derivatives markets Essentially it represents of the cost of replacing all existing contracts It provides a measure of market size and economic significance that is readily comparable across derivatives markets and products.
Gross credit exposure represents the current value of
contracts that have a positive market value after taking account of legally enforceable bilateral netting agreements, i.e it measures netted credit exposures between counterparties.
Turnover data collected in the triennial survey provide a
measure of market activity, and can also provide a rough proxy for market liquidity Turnover is defined as the absolute gross value of all new deals entered into during the month of the surveys, and is measured in terms of nominal or notional amount of the contracts.
Trang 3value and gross credit exposure both rose:
- Notional value Moves to greater centralised clearing have contributed to
a 13% fall in the notional value of OTC derivatives from $684 trillion in
June to $592 trillion in December 2008 (Chart 1) This is the first such
fall to be recorded by BIS since it started compiling the statistics in 1998
Notional value of exchange-traded derivatives declined by 27% in the
second half of 2008, and was only one tenth the value of OTC
derivatives at the year end
- Gross market value more than doubled from $15.8 trillion to
$33.9 trillion between the end of 2007 and 2008 (Chart 3) This was a
result of volatility of prices associated with increasing risk in many
derivatives contracts
- Gross credit exposure reflected the rise in gross market value although
the rise was less, up by 53% from $3.3 trillion to $5.0 trillion (Chart 3)
Risk instruments Interest rates are the main instrument in the OTC
derivatives market, having accounted for around 70% of contracts in recent
years (Table 2) The share of derivatives based on foreign exchange contracts
has fallen from 11.3% to 8.4% since 2004 Declining prices in equity markets
have contributed to a lower share of equity derivatives over the past two
years More recently the slump in commodity prices in 2008 halved
commodities share from 1.4% to 0.7% CDS share fell from 9.7% to 7.1%
(see paragraph on CDS on page 4)
Currency composition The euro and the US dollar are the most widely
traded currencies in single currency interest rate derivatives, with 37% and
35% shares respectively in 2008 (Table 3) They were followed by the
Japanese yen with over 13% and pound sterling 7% Swedish krona and
Swiss franc each made up just over 1% and other currencies 5%
II BIS coordinated triennial central bank survey (April 2007)
Location International OTC derivatives trading is heavily concentrated in the
UK and US (Table 4) The share of global turnover of the UK and US
remained stable at 43% and 24%, respectively, in the April 2007 survey
Over the longer period the UK’s share has risen from 36% in 2001, while the
US share has grown from 18% Germany’s market share dropped from 13%
in 2001 to 4% in 2007 and France from 10% to 7% Ireland showed the
largest gain with its share rising from less than 1% in previous
surveys to over 3% in 2007 Japan’s share also edged up to just
over 3%
Counterparties The major feature of the global counterparty
breakdown was a further rise in the share of other financial
institutions to 44%, close to the 46% share of reporting dealers
The global share of non-financial customers also edged up to
10% Distribution of trading by counterparty in the UK was
more closely aligned with global shares in 2007 than
previously
Concentration The OTC derivatives market in the UK became
even more concentrated between 2004 and 2007, with the share Source: Bank for International Settlements
UK US France Germany Japan Ireland Switzerland Singapore Italy Others Total
2001
275 135 67 97 22 6 15 6 24 141
764
Average daily turnover in April
2001
36.0 17.7 8.8 12.7 2.9 0.8 2.0 0.8 3.1 18.5
100.0
1998
36.0 18.9 9.7 7.2 8.8 0.6 3.4 2.3 1.1 13.1
100.0
2007
42.5 23.9 7.2 3.7 3.3 3.3 2.9 2.7 1.3 10.5
100.0
1998
171 90 46 34 42 3 16 11 5 62
475
2007
1081 607 183 93 85 85 73 69 32 268
2544
Table 4 Location of OTC derivatives turnover
2004
643 355 154 46 39 13 18 17 41 223
1508
2004
42.6 23.5 10.2 3.1 2.6 0.9 1.2 1.1 2.7 14.8
100.0
-$bn - -%
share -Source: Bank for International Settlements
Notional amounts outstanding
$ trillion, by currency, end-year
Table 3 Currency breakdown of single currency
interest rate derivatives
Euro
US dollar Japanese yen
£ sterling Swedish krona Swiss franc Others
All currencies
2008
155 146 56 30 5 5 22
419
2007
146 130 53 28 5 4 27
393
2008
37.0 34.9 13.5 7.1 1.2 1.2 5.2
100.0
2007
37.2 33.0 13.5 7.2 1.3 1.0 6.7
100.0
-%
share -Source: Bank for International Settlements
$ trillion
Interest rates Foreign exchange Credit default swaps Equity-linked Commodity Unallocated Total contracts
% share
Interest rates Foreign exchange Credit default swaps Equity-linked Commodity Unallocated Total contracts
Notional amounts outstanding in December
Table 2 Risk instruments in global OTC markets
2004
191 29 6 4 1 27 259
73.7 11.3 2.5 1.7 0.6 10.3 100.0
2002
102 18 -2 1 18 142
71.8 13.0 -1.6 0.7 12.9 100.0
2006
292 40 29 7 7 43 418
69.7 9.6 6.9 1.8 1.7 10.3 100.0
2007
393 56 58 8 8 71 595
66.0 9.4 9.7 1.4 1.4 12.0 100.0
2008
419 50 42 6 4 71 592
70.7 8.4 7.1 1.1 0.7 12.0 100.0
Trang 4of the largest 10 institutions rising from 79% to 81% In 1995 the share of the
top ten had been 52% In the US, the other major location, survey data
indicates that in 2007 the share of the largest ten institutions was even
higher than in the UK at over 90% of turnover
III Other developments in OTC derivatives markets
Centralised clearing Concerns about the systemic risk posed by some OTC
derivatives contracts were raised in the wake of the credit crunch These
focused on the potential impact of the collapse of Lehman Brothers on other
brokers; and the potential threat posed by the huge volume of toxic securities
As a result some classes of standardised OTC derivatives contracts,
including interest rate swaps, commodities and CDS have been brought into
centralised clearing
Credit default swaps (CDS) In CDS one party promises to pay another party
a fixed fee in exchange for a guarantee that if a bond defaults it will be
redeemed Centralised clearing and voluntary termination of contracts has
contributed to a 39% drop in notional amounts outstanding of CDS from
$62 trillion at end-2007 to $38 trillion at end-2008, according to the
International Swaps and Derivatives Association (ISDA) (Chart 4) This
decline is slightly larger than the 28% fall in the BIS data, although
previously the two series have moved closely in parallel ISDA’s longer
time series show that notional value of CDS had mushroomed over the
previous four years from less than $4 trillion at end-2003
Energy derivatives There are a range of participants actively trading
energy-related financial instruments including oil and gas producers,
utilities, refiners and other industrial consumers, investment banks and
hedge funds Following several years of strong growth in the energy OTC
derivatives markets covering power and gas forward contracts, trends in the
year to end-July 2008 were more mixed The FSA’s annual survey of
energy market brokers showed that volumes in 2008 in the UK gas and
European power were down by 23% and 41% respectively having both
doubled in 2007 (Table 5) These two markets remain the largest by
volume By contrast the other four markets all saw growth in trading in
2008, particularly emissions trading
Applied prices rose by between 50% and 100% in the markets covered in the
survey This is consistent with the strong rise in global commodity prices that
was in evidence across the survey period As a result, the notional value of
four of the six markets - UK power, Euro gas, coal and emissions - more than
doubled in 2008 Notional value of gas contracts also rose, by 31% to
£176bn, as the jump in prices more than offset the 23% fall in volume In the
case of European power notional market value fell by 9% as the 54% rise in
price was insufficient to counter the drop in volume Between a half and three
quarters of business in the various markets was traded through screen-based
electronic platforms
Freight derivatives A number of the large broking houses are using freight
derivatives to hedge or take a position on the future movement of freight
rates According to Baltic Exchange estimates, the notional value of trading
in Forward Freight Agreements (FFAs) in the OTC derivatives market rose
from $142bn in 2007 to $163bn in 2008, although the steep decline in Source: Baltic Exchange, Forward Freight Agreement Brokers' Association
Chart 5 Freight derivatives
$bn, notional freight value of Forward Freight Agreements traded each year
0 20 40 60 80 100 120 140 160
2008 2007 2006 2005 2004 2003 2002 2001 2000
*TWH: terawatt hours Source: FSA survey of energy derivatives markets
Size of market, TWH*
UK power
UK gas Euro power Euro gas Coal (m tonnes) Emissions (m tonnes)
Notional value of market, £bn
UK power
UK gas Euro power Euro gas Coal Emissions
2005 688 5089 2525 689 415 121
25 54 77 7 45 1.5
% change 2008 12 -23 -41 36 22 151
110 31 -9 145 143 302
Contracts transacted by brokers in the UK, Twelve months ending July
Table 5 Gas & power derivatives
2004 1311 4206 2879 895 576 1
35 40 45 3.5
-2006 646 6131 3127 673 926 379
30 108 147 11 107 5.5
2007 985 12810 6337 1110 1305 780
30 134 193 11 46 8.8
2008 1104 9919 3758 1509 1595 1956
63 176 178 27 111 36
Source: International Swaps and Derivatives Association (ISDA), Bank for International Settlements (BIS)
Chart 4 Credit default swaps
$ trillion, notional amounts outstanding, end-year
0 10 20 30 40 50 60
2008 2007 2006 2005 2004 2003 2002 2001 2000
ISDA
BIS
Trang 5shipping markets is likely to result in a much smaller market in 2009
(Chart 5) Previously the market expanded rapidly from $7bn in 2002 to
$61bn in 2006 Up until the drop in the market in autumn 2008, FFAs were
being increasingly used by larger charterers, shipowners and also by
financial institutions such as investment banks The dry bulk market, such as
grain and coal, accounted for 95% of the total value of contracts in 2007 and
2008 with wet cargoes, such as oil, making up the remaining 5% The
predominance of dry bulk is due to the much higher share of freight costs in
the dry market
EXCHANGE-TRADED DERIVATIVES MARKETS
International exchange trading
International trading on the exchanges is most easily compared on the basis
of the number of contracts traded, although these comparisons are heavily
influenced by the contract sizes selected by individual exchanges Small
contract sizes raise the number of contracts traded, a particular feature of the
Korean, Mexican and Brazilian exchanges, where trading is dominated by
individual rather than institutional investors Comparisons based on the
nominal value of turnover therefore provide a better indicator of the relative
size of the exchanges
Value of turnover Notional outstanding value of exchange-traded
derivatives fell by 29% in the second half of 2008 (Chart 1), while value of
turnover dropped by 47% in the 12 months to Q1 2009 (Chart 2) Strong
trading in the first half of 2008 meant that annual turnover fell by only 3% to
$2,213 trillion, having risen by about a quarter annually in each of the four
previous years (Chart 6) BIS notes that the decline in trading during the
second half of 2008 reflects a combination of significantly reduced risk
appetite, expectations of stable low interest rates in major markets and lower
hedge fund activity The decline in turnover slowed to 3% between Q4 2008
and Q1 2009 (Chart 2)
Turnover of exchange-traded derivatives is heavily concentrated on the
exchanges of North America and Europe, which have accounted for over
90% of trading by value in recent years According to BIS data, 53%
of turnover by value in 2008 was based in the North American
exchanges, 39% in Europe, 7% in Asia/Pacific and 1% in other
regions of the world (Chart 6) Europe’s share has picked up from
32% in 2006, while North America’s has fallen back from 60%
Mergers and acquisitions in recent years have produced a number of
exchange groups that each own several subsidiary exchanges The
largest such exchange group is CME Group, which includes the
Chicago Mercantile Exchange, the Chicago Board of Trade and New
York Mercantile Exchange NYSE Euronext, which incorporates the
NYSE Liffe, is the second largest on value of trading, followed by
Eurex (Chart 7) Over a half of the value of turnover on financial
exchanges is concentrated amongst these three exchange groups
Number of contracts traded The number of contracts transacted
through derivatives exchanges worldwide has continued to rise in
2008 to 17.8bn CME Group, with 3.3bn contracts, is the largest
0 250 500 750 1000 1250 1500 1750 2000 2250
2008 2007 2006 2005 2004 2003 2002 2001 2000
Source: Bank for International Settlements
Chart 6 International exchange-traded
derivatives turnover by region
$ trillion, annual value of turnover
Europe North America Other regions
59%
34%
51%
8%
33%
58%
35%
15%
7%
60%
32%
8%
59%
32%9%
50%
9%
41%
54%
7%
38%
56%
35% 9%
53%
39% 8%
Source: CME Group, NYSE Liffe & Eurex
Chart 7 Largest derivatives exchanges
Value of derivatives turnover, $ trillion
CME
NYSE Liffe
0 200 400 600 800 1000 1200
2008 2007 2006 2005 2004 2003 2002 2001 2000
Eurex
1 Includes NYSE Liffe markets in London, Amsterdam, Paris, Brussels & Lisbon
2 Includes ICE Europe basd in London Source: Futures Industry Association
1 2 3 4 5 6 7 8 9 10 11 12 13 14 21
Annual number of contracts traded, millions
2006
2443 2119 2475 1124 675 571 396 194 105 120 80 140 46 94 87
2005
1940 1697 2593 1106 468 466 266 132 51 198 53 82 28 78 79
Exchange
CME Group Eurex Korea Futures Exchange NYSE Euronext 1
CBOE Holdings
BM & F Bovespa Nasdaq OMX Group National Stock Exchange of India SAFEX Securities Exchange Dalian Commodity Exchange Russian Trading Systems Stock Exch.
Intercontinental Exchange 2
Zhengzhou Commodity Exchange Boston Options Exchange London Metal Exchange
Table 6 Largest derivatives exchange groups
2007
3158 2704 2777 1525 946 794 551 380 330 186 144 196 93 130 93
2008
3278 3173 2865 1674 1195 742 722 590 514 313 238 237 223 179 113
Trang 6exchange based on the number of contracts traded (Table 6), followed by
Eurex 3.2bn, the Korea Futures Exchange 2.9bn, and NYSE Euronext 1.7bn
Looking at other UK-based exchanges, ICE Futures Europe accounts for the
majority of trading in Intercontinental Exchange, the 12th exchange listed,
while the London Metal Exchange is 21st Based on the location of the
subsidiary exchanges, the US accounted for 39% of the number of contracts
traded in 2008 followed by South Korea 16%, Germany 12% and the UK 6%
(Table 7)
Electronic trading European financial exchanges have been electronic since
the late 1990s, and electronic trading on the US derivatives exchanges has
become predominant On CME Group, the share of electronic trading has
risen from 20% in 2001 to 83% in 2008
Exchange traded derivatives in the UK
There are four derivatives exchanges operating in the UK, all of which had a
record year in 2008 for number of contracts traded:
NYSE Liffe Following the merger of Liffe’s parent Euronext with NYSE, it
was renamed NYSE Liffe Turnover at NYSE Liffe rose by 11% in 2008 to
1.05bn contracts (Table 8) Trading in short term euro interest rate contracts,
for which NYSE Liffe is the leading exchange, has accounted for 97% of the
exchange’s annual turnover by value in recent years Trading on the London
platform accounted for 98% of the value of all Liffe turnover in 2008
London Metal Exchange Turnover of LME contracts rose by 23% in 2008 to
reach 113m contracts Primary aluminium has been the most widely traded
metal in recent years It accounted for 46% of trading in 2008, followed by
copper 25% and zinc 15%: these shares are much in line with previous years
ICE Futures Europe ICE Futures Europe turnover rose by 10% to 153m
contracts in 2008, but had risen much more rapidly in the previous two years
partly due to the introduction of the West Texas Intermediate launched in
2006 Brent Crude futures remains the biggest contract with 45% of turnover
in 2008 Trading in the two key oil contracts rose by over 50% to 111m
European Climate Exchange (ECX), which is part of ICE Futures Europe, is
the dominant exchange for futures and options trading in the EU Emissions
Trading Scheme ECX accounted for 91% of futures and options contracts
traded in the EU ETS in 2008 and 98% in the first five months of 2009
(Table 9)
EDX London Trading in the exchange’s indices and single stock products
totalled 60m contracts in 2008 up from 43m in 2007
Remote trading from the UK The UK is an important source of remote
trading for the increasing volume of derivatives business globally that is
transacted electronically A geographic breakdown for the origination of
Eurex derivatives contracts data shows that, since the move from floor to
remote electronic trading in the mid-1990s, UK-based traders have become
increasingly prominent The share of Eurex contracts sourced from the UK
has been at least 45% each year since 2003 (Chart 8) Liffe estimates that
60% of its business originates in London
Table 9 EU ETS futures & options exchange trading
Volume of emissions transacted through futures & options, million tonnes CO 2 ( mtCO 2)
Source: Thomson Reuters *First five months of 2009
Other exchanges -4 26 101 15
Nord Pool 28 59 95 107 15
2005 2006 2007 2008 2009*
Total 123 517 1159 2441 1922
ECX/ICE 94 453 1038 2234 1892
Table 8 Turnover of London-based
derivatives exchanges
1 IPE before 2005 2 Includes other NYSE Liffe exchanges after 2000
3 EDX London was created in 2003 4 First 5 months of 2009 Source: Exchanges
1990 1995 2000 2005 2006 2007 2008
2009 4
ICE Futures Europe 1
6.9 15.0 25.5 42.1 92.9 138.5 153.0 64.6
Total 54.6 198.6 223.0 900.3 939.0 1222.8 1375.7 574.7
EDX London 3
-20.3 28.8 43.1 59.9 26.0
LME
13.4 47.2 66.4 78.6 86.9 92.1 113.2 44.8
NYSE Liffe 2
34.3 136.4 131.1 759.3 730.3 949.0 1049.7 439.4 Millions of contracts traded each year
Chart 8 Turnover of Eurex participants
by country of origin
Millions of derivatives contracts traded each year
Germany UK Other countries
0 200 400 600 800 1000 1200 1400 1600 1800 2000 2200
45%
38%
30%
35%
20%
12% 32%
48%
35%
17%
7%
46%
38%
16%
46%
35%
19%
Table 7 Exchange-traded derivatives turnover,
based on location of subsidiary exchanges
Source: Futures Industry Association
US Korea Germany UK Brazil India China South Africa Russia Japan Other countries
Total
Annual number of contracts traded, millions
% share
2006
4573 2475 1527 724 571 293 225 105 120 218 1180
12011
2007
39.1 17.8 12.2 6.2 5.1 3.1 2.3 2.1 1.5 1.9 8.6 100.0
2007
6091 2777 1900 970 794 484 364 330 229 292 1338
15570
2006
38.1 20.6 12.7 6.0 4.8 2.4 1.9 0.9 1.0 1.8 9.8 100.0
2008
6952 2865 2165 1135 742 709 676 514 370 316 1266
17771
2008
39.1 16.1 12.2 6.4 4.2 4.0 3.8 2.9 2.1 1.8 7.5 100.0
Trang 7CONTRIBUTION OF DERIVATIVES TO THE UK ECONOMY
Derivatives provide a set of risk management tools for a wide range of
organisations, so the wider economic contribution of derivatives is seen in the
benefits they bring to individuals and businesses - access to finance at lower
costs, achieving more stable commodity prices and controlling foreign
exchange risk for importers and exporters
The estimation of derivatives' contribution to the economy in terms of shares
of GDP, employment and overseas earnings is not straightforward In other
financial markets the value of activity is related to revenue and profits of the
firms involved With derivatives the measures of market activity cannot be so
easily ascertained, partly because the value of a derivative is related to the
shifting value of the underlying asset Available data for the UK is set out
below
Employment related to the derivatives markets is widely spread across
trading floors in investment banks, derivatives exchanges, other dealers of
futures, options and commodities, and various support and back office
functions It is estimated that there are about 10,000 people employed in
derivatives in central London
Overseas service earnings include banks’ spread earnings and net fee income
on derivatives contracts; fee income of futures and options dealers; and fees
and commissions on exchange contracts of UK-based derivatives exchanges
Banks’ spread earnings and fee income Banks generate substantial earnings
from spread earnings on derivatives, foreign exchange trading and other
securities transactions These net exports, currently published as an
aggregate, have grown rapidly since 2000, reaching £9.5bn for 2007, the
latest available year, and 35% up on £7.0bn in 2006 (Chart 9) Overall
figures for UK financial sector exports showed surprising buoyancy in 2008,
so spread earnings are likely to have remained in the region of £10bn in 2008
Derivatives are estimated to account for the majority of banks’ spread
earnings
Separate data on banks’ net fee income is based on gross derivative fees
receivable from foreign residents for derivatives services, netted off against
fees payable Because of the move to inclusion of the commission in the
spread, data reported by banks’ to the Bank of England on their net overseas
service earnings from derivatives is modest, although a surplus of £218m in
2007 reversed a deficit of £118m in 2006
Fee income of futures and options dealers Net exports of futures and options
dealers have not been separately identified in balance of payments statistics
since 2002 when they totalled around £250m
Fees and commissions on exchange contracts and clearing These are
significant as a majority of customers of UK exchanges and clearing
organisations are based overseas or owned by overseas companies,
three-quarters in the case of Liffe and over 90% at the LME
International investment position Growing derivatives business of the UK
financial sector is also reflected in the rising value of financial derivatives in
the international asset position of UK financial institutions Data shows that
financial derivatives assets rose by 62% between end-2006 and end-2007 to
Source: Office for National Statistics, Bank of England
Chart 9 UK banks' net exports from
spread earnings
£bn, spread earnings on derivatives, foreign exchange trading & other securities' transactions
0 2 4 6 8 10
2007 2005 2003 2001 1999 1997
Source: Office for National Statistics, Bank of England
Chart 10 Financial derivatives: international
assets of UK financial institutions
Financial derivatives, assets valued at end-year, £bn
0 200 400 600 800 1000 1200 1400 1600 1800
2007 2006 2005 2004 2003 2002 2001 2000 1999 Banks Securities dealers etc.
Trang 8reach £1,824bn (Chart 10) Data published by the ONS, based on Bank of
England data, is at present experimental, and so is not yet included in the
financial account of the UK balance of payments
Banks account for around three quarters of financial derivatives assets - 76%
in 2006 and 2007 - with securities dealers making up nearly all of the
remainder Insurance companies and pension funds contribute less than 1%
of the total The share of securities dealers has doubled from around 12%
between 1999 and 2002 to about 24% in 2006 and 2007
8
International Financial Services
Londonis a private sector organisation, with
nearly 40 years experience of promoting the
UK-based financial services industry
throughout the world.
City of London Corporationadministers and promotes the world’s leading international finance and business centre and provides free inward investment services.
In partnership with:
UK Trade & Investmenthelps UK-based companies succeed in international markets and assists overseas companies to bring high quality investment to the UK’s vibrant economy.
Data files
Datafiles in excel format for all charts and tables published in this report can be downloaded from the Reports
section of IFSL’s website www.ifsl.org.uk Sign up for new reports
If you would like to receive immediate notification by email of new IFSL reports on the day of release please send your email
address to download@ifsl.org.uk
IFSL Research:
Report author: Duncan McKenzie
Director of Economics, Duncan McKenzie
d.mckenzie@ifsl.org.uk +44 (0)20 7213 9124
Senior Economist: Marko Maslakovic
m.maslakovic@ifsl.org.uk +44 (0)20 7213 9123 International Financial Services London 29-30 Cornhill, London, EC3V 3NF
This report on Derivatives is one of 15 financial sector reports
published by IFSL All IFSL’s reports can be downloaded at:
www.ifsl.org.uk
© Copyright June 2009, IFSL
This brief is based upon material in IFSL’s possession or supplied to us, which we believe to be reliable Whilst every effort has been made to ensure its accuracy, we cannot offer any guarantee that factual errors may not have occurred Neither International Financial Services London nor any officer or employee thereof accepts any liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness This publication is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the provision of
OTHER SOURCES OF
INFORMATION
Alternative Investment Management
Association.
www.aima.org
Association of Corporate Treasurers
www.treasurers.org
Bank for International Settlements
Triennial surveys of OTC derivatives
markets
International Banking and Financial
Market Developments (quarterly)
www.bis.org
Bank of England
www.bankofengland.co.uk
Bourse Consult
Current issues affecting the OTC
derivatives market and its importance
to London, April 2009
www.bourse-consult.com
Financial Services Authority
Analysis of activity in the energy
markets 2008
www.fsa.gov.uk
EDX London
www.londonstockexchange.com/edx/
Eurex
www.eurexchange.com
Futures and Options Association
www.foa.co.uk
Futures Industry Association
www.futuresindustry.org
ICE Futures Europe
www.theice.com
International Swaps and Derivatives Association
www.isda.org
LCH.Clearnet
www.lchclearnet.com
London Metal Exchange
www.lme.co.uk
NYSE Liffe
www.euronext.com/derivatives
Thomson Reuters
Carbon Market Community
http://communities.thomsonreuters.com /Carbon