Derivatives volumes are up – and it’s giving the buy-side a headache

Equity index derivatives volumes jumped 73% in 2022, according to the Futures Industry Association (FIA) - but the increase is causing higher operational risk and capacity burdens for asset managers and buy-side traders.

The FIA futures and options exchanges data findings for December 2022 and annual year 2022 show that numbers are broadly up for listed futures and options, with equity index derivatives volumes increasing 73% to 48.6 billion in 2022, making up more than half the overall global total.

The worldwide volume of exchange-traded derivatives reached 8.44 billion contracts in December, up 8.9% from November 2022 and up 37.4% from December 2021.

Options also continue to gain in popularity. Global trading of options reached 6.02 billion contracts in December, up by more than 67% from last year, with most of that trading taking place in the Asia Pacific region. Global trading of futures reached 2.42 billion contracts in December, down 4.8% from the same month last year.

On an annual basis, volume in 2022 was 83.85 billion contracts, up 34% from 2021, with the majority of that increase coming from equity index contracts.

Total options volume for the year was 54.53 billion contracts, up 63.7% from the previous year, while the total futures volume was 29.32 billion contracts in 2022, up 0.1% from 2021.

Total open interest at the end of December was 1.09 billion contracts. The December total was down 12.4% from November 2022 but up 0.9% from a year ago.

But while these volumes are great for exchanges, it’s not all blue skies for asset managers and buy-side traders: for whom the higher volumes pose a challenge from an exchange traded derivatives allocation perspective, as higher volumes result in higher operational risk and capacity burdens.

“Volumes hitting record highs reinforces why the industry needs to work together to solve the ETD workflow conundrum once and for all,” stressed Joanna Davies, head of FX and securities at OSTTRA, speaking exclusively to The TRADE.

“When volumes rise, the operational risk and capacity burden on market participants intensifies. Even if an asset manager is highly efficient in the allocation process during times of peak volumes, there could still be multiple allocations being communicated within minutes of the market closing. This creates an entire myriad of problems, which the industry continues to wrestle with.

“Even if the asset manager allocates early in the day, the challenge for executing brokers is to identify the exchange fills (executions) associated with a single order. These executions at different price levels must be average priced before they are given up. To compound the challenge, in keeping with their mandates, asset managers are executing multiple orders during volatile periods to manage the risk within their portfolios.

“Overcoming this longstanding issue requires continued industry wide collaboration on designing the workflows with asset managers, executing brokers, and clearing brokers.”