The OTC derivatives markets after financial reforms
This commentary provides a snapshot of the current status of the global OTC derivatives markets by: i) identifying general trends over the past decade, ii) looking at the changes in the market structure (instruments and participants), iii) estimating the uncollateralised derivatives exposure and iv) examining the relationship between OTC and ET derivatives.
- Over the past five years, the OTC derivatives market showed an impressive resilience in levels of market activity, which are now above pre-crisis levels in outstanding notional value. This confirms its systemic importance. Current volatility of the gross market values and gross credit exposures can be attributed to the uncertain market conditions for the global economy.
- Distribution of derivatives instruments has remained relatively constant over the past decade. Central clearing and portfolio compression is developing fast for interest rate and credit derivatives, while progress in other asset classes is fairly slow.
- The OTC derivatives market is structured with a highly interconnected system of financial institutions. But composition is changing from a dealer-driven business to a more diversified environment, with other financial institutions (such as CCPs and investment funds) playing a greater role.
- Uncollateralised exposure is estimated in constant decline as a result of better collateralization of OTC derivatives exposures, either through bilateral collateral agreements or the use of CCPs, and improvement of market conditions.
- A structural shift of OTC derivatives to organised trading platforms is still not happening. Despite high volumes of on-exchange commodity derivatives and increasing volumes of interest rate derivatives traded on organized platforms, the market for OTC derivatives continues to be bigger than the exchange-traded side of the market, but the situation may rapidly change as the trading obligations gradually enter into force across key jurisdictions.