Global OTC market sees improvement

The global OTC derivatives market has seen a recovery in FX and interest rate markets, but credit, equities and commodities are still lagging behind, according to a report from consultancy Celent.

The global OTC derivatives market has seen a recovery in FX and interest rate markets, but credit, equities and commodities are still lagging behind, according to a report from consultancy Celent.

The report, ‘OTC derivatives markets: Staging a recovery,’ looks at the performance of derivatives before and after the financial crisis, and shows the total notional outstanding for the market has been rising in the last decade, though there has been a decline since June 2011.

“We believe that the market has stabilised since the financial crisis and now the next big development would be the impact of OTC derivatives regulation,” the report said.

“The high margins that are required for clearing mean that there might be a fall in volume as players gear themselves up for trading in the new environment.”

Celent believed the move towards exchange-like swap execution facilities (SEFs) to trade OTC derivatives in the US marks an important milestone, but it remains to be seen how it will impact the overall market.

The report showed notional outstanding for FX contracts has gone up to US$67.3 billion in the second half of 2012  – the highest since 1998, with the main products being forwards, FX swaps and currency swaps.

The interest rate market reached US$489.7 billion in H2 2012, and is expected to benefit from counterparty clearing and higher levels of electronic trading through SEFs.

Interest rate swaps were the main product in terms of notional amounts outstanding, but while the market has increased since the financial crisis, Celent found there has been a slight decline in the last couple of years.

Credit default swaps have taken a blow over the past few years from US$32.4 billion in H1 2011 to US$25 billion in H2 2012, while equity has been stable around the US$6 billion-mark since December 2008, the report found.

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