Dancing in the streets ...
Exchange Traded Derivatives Rise 30% to $692 Trillion, BIS Says
By Liz Capo McCormick
June 9 (Bloomberg) -- Trading in derivatives, led by short- term interest-rate futures, climbed 30 percent to a record $692 trillion in the first quarter, signaling a possible easing of tensions in the money markets, the Bank for International Settlements said.
The value of short-term interest-rate futures traded on exchanges rose to $548 trillion during the three months ended March 31, a gain of 32 percent over the same period last year, the Basel, Switzerland-based BIS said today. The contracts are designed to speculate on, or hedge against, moves in borrowing rates. The figures are based on the notional amounts underlying the agreements.
The increased trading ``suggests that liquidity conditions in the term money markets might have recovered to some extent after the stressful 2007 year-end,'' analysts Naohiko Baba, Patrick McGuire and Goetz von Peter wrote in the BIS's quarterly review.
The gains were concentrated in derivatives denominated in U.S. dollars and euros, which had undergone a ``significant retreat'' in the prior quarter, they wrote. Banks were still pressed for cash, according to another part of the report.
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. 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.
Eurodollar Deposits
Turnover in futures and options on three-month Eurodollar deposit rates ``picked up sharply'' in the period, extending a rise from the previous quarter, said the BIS, a global organization formed in 1930 that monitors financial markets and serves as a bank for central banks.
Eurodollar futures are priced at expiration to the three- month London interbank offered rate, or Libor, for U.S. dollars. Turnover in futures and options on the federal-funds rate fell in the quarter.
The increase in exchange-traded derivative trading in the first quarter erased a 21 percent slide in the previous period, the biggest drop in at least 14 years. Trading had declined as banks hesitated to lend to each other amid mounting losses on securities linked to U.S. subprime mortgages.
Even as conditions in the money market improved in the first quarter, early signs in the current quarter show that banks were still pressed for cash, BIS analysts Ingo Fender and Peter Hordahl wrote in a separate section of the report.
`Extreme Stress'
``Interbank money markets continued to show clear signs of extreme stress from March to May,'' they wrote. ``Spreads between Libor rates and corresponding overnight indexed swap (OIS) rates, due to counterparty credit risk as well as liquidity concerns, were generally at least as high at the end of May as three months earlier.''
This appears to imply there were expectations that interbank strains ``were likely to remain severe well into the future,'' Fender and Hordahl wrote.
Trading in stock index futures and options fell 2.7 percent to $73 trillion in the fourth quarter, compared with $75 trillion in the prior quarter, according to BIS analysts Baba, McGuire and von Peter. Trading rose 22 percent versus the same period a year earlier. The Standard & Poor's 500 index declined 9.9 percent in the three months to March 31. The Dow Jones Stoxx 600 Index in Europe dropped 16 percent during the same period.
Currency Swings
Foreign exchange futures and options volumes advanced in the first quarter, led by trading in the euro, yen and Swiss franc derivatives, the BIS said. These increases offset retreats in currencies that included the Canadian dollar and the U.K. pound.
Trading in currency futures and options rose to $6.7 trillion, a jump of 11.7 percent from fourth-quarter 2007 and a gain of 32 percent from the same period last year, the BIS said.
Volatility implied by options among the seven most-traded currencies increased 25 percent in the first quarter, matching the rise in the previous quarter, a JPMorgan Chase & Co. index shows.
Global trading in commodity derivatives grew by 52 percent to 489 million contracts in the first quarter from the year-ago period. The BIS said notional figures weren't available. Agricultural and energy products led the climb, it said. Commodity trading data is not included in the BIS's aggregate derivative figures.
Over the Counter
Trading in derivatives not listed on exchanges increased during the second half of 2007, led by growth in the credit segment ``due possibly to heightened demand for hedging credit exposure,'' the BIS said.
The notional value of all outstanding over-the-counter derivatives rose 15 percent in the second half to $596 trillion, following a 24 percent gain in the first half of the year, the BIS said.
The gross market value of credit default swaps, which measures the cost of replacing all existing contracts, almost tripled to $2 trillion in the second half of 2007, compared with a rise of 53 percent in the first half, the BIS said.
Credit-default swaps, which make up the majority of credit derivatives, are financial instruments investors use to speculate on the ability of companies to repay debt or hedge against the risk they won't. |
