Exchanges fail to win derivatives market share from OTC trading

BIS quarterly review finds exchanges are struggling to attract derivatives trading from OTC markets.

Exchanges have failed to win market share of derivatives trading from the over-the-counter (OTC) markets over the last three years, despite a surge in derivatives activity.

The Bank of International Settlements’ (BIS) latest quarterly review conducted a survey in April this year and polled 1,300 financial institutions in 52 countries.

It found the daily average turnover of foreign exchange and interest rate derivatives traded worldwide – on exchanges and OTC – surged from $10.5 trillion in April 2013 to $11.3 trillion in April 2016.

Despite this, the exchange-traded share remained relatively unchanged at 46%, according to BIS.

BIS also found foreign exchange derivatives is ‘overwhelmingly’ traded in OTC markets, with daily average turnover soaring to $3.4 trillion in April this year, compared to just $0.1 trillion traded on exchanges in the same period.

Though interest rate derivatives are traded mainly on exchanges, BIS said the OTC market share is increasing.

In the 2000s, the proportion of interest rate derivatives traded on-exchange declined from 80% to 66% in April this year.

The review explained innovations in the market “appear to have made OTC more attractive,” referencing exchange-like mechanisms introduced to trade OTC instruments.