OTC derivatives not immune to Covid-19 market turmoil

The surge was led by increases in interest rate derivatives, it noted.

The pandemic, which sparked economic disruption, market turmoil and government action, “drove developments in derivatives markets in the first half of 2020,” the BIS said.

Interest rate derivatives jumped by 40% in gross market value, the BIS said, led by an 86% increase in US dollar-denominated contracts. This was the largest such increase since the 2007-2009 global financial crisis.

The report also noted that other types of derivates rose in the first half of 2020, which reflects the large price movements and elevated market volatility of the time.

For instance, the gross market value of commodity contracts increased by 32% in the first half while OTC foreign exchange contracts and equity-linked contracts also rose.

Conversely, the market value of credit derivatives decreased by 10% in the first half.

Alongside the sharp increase in market value, gross credit exposure for OTC derivatives surged from 2.4 trillion to $3.2 trillion in the first half of the year.

“This was the largest rise since 2009,” the report noted.

While market values and credit exposures both rose notably, the notional amount of OTC derivatives was relatively stable, the BIS said, rising 9% during the first half, which was “broadly in line with the trend observed in recent years.”

The increase in notional amounts also primarily came in interest rate derivatives, which rose from $449 trillion to $495 trillion as of the end of June.

“The notional amounts of other contracts remained relatively flat over the same period,” it said.

The report also said that central clearing rates rose in the first half, particularly for credit default swaps.