The OTC derivatives markets after financial reforms

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23 May 2014
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  • 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.

Cosmina Amariei is Research Assistant at ECMI. Diego Valiante is Head of Capital Markets Research at ECMI and CEPS.