Derivative Trades Fell Most in 14 Years in Money Market Freeze
By Hamish Risk
March 3 (Bloomberg) -- Derivative trading fell 21 percent to $539 trillion in the fourth quarter, the biggest drop in at least 14 years, as the freeze in money markets reduced the need to hedge risks, the Bank for International Settlements said.
Interest-rate futures, contracts designed to speculate on or hedge against moves in borrowing rates, led the fall in exchange- traded contracts with a 25 percent decrease to $405 trillion during the three months ended Dec. 31, the Basel, Switzerland- based BIS said today. The amounts are based on the notional amount underlying the contracts.
Trading declined as banks were hesitant to lend to each other as losses on securities linked to U.S. subprime mortgages mounted. The logjam pushed short-term interest rates to the highest in seven years, prompting central banks including the Federal Reserve and the Bank of England to coordinate efforts to restore confidence in money markets.
``The impairment of liquidity in term money markets may have been a factor dampening turnover in futures and options,'' BIS analysts Patrick McGuire, Goetz von Peter and Naohiko Baba wrote in the report.
Trading in stock index futures and options fell 7 percent to $75 trillion in the fourth quarter. The Standard & Poor's 500 index fell 13.1 percent in the three months to Dec. 31. The Dow Jones Stoxx 600 Index in Europe fell 16 percent in the same period.
Currency Swings
Smaller swings in currencies meant that foreign exchange futures and options volumes were little changed in the quarter. Volatility among the seven most-traded currencies rose 25 percent in the quarter, less than the 34 percent jump in the previous three months, a JPMorgan Chase & Co. index shows.
Trading in currency futures and options decreased 0.3 percent to $6 trillion, the BIS said.
A derivative is a financial obligation whose value is derived from interest rates, the outcome of specific events or the price of underlying assets such as debt, equities and commodities. Companies and investors use them to hedge against, or speculate on, price changes.
Derivatives include futures, which are agreements to buy or sell assets at a set date and price, and options, which are the right but not the obligation to do so.
The BIS, formed in 1930, monitors financial markets and regulates banks. |
