OTC derivatives market declined in 2021, new data shows

The Bank for International Settlements shows a significant decrease in gross market value, as the market returns to pre-pandemic levels and concerns over economic uncertainty subside.

A new report from the International Swaps and Derivatives Association (ISDA) regarding OTC derivatives shows a significant decrease in the gross market value and gross credit exposure of interest rate derivatives (IRD) and foreign exchange derivatives during the second half of 2021 compared to the second half of 2020 and year-end 2020.

“Gross market value and gross credit exposure significantly increased in 2020 due to pandemic-related market uncertainty. The decline in the second half of 2021 represents a return to pre-pandemic levels,” said ISDA.

OTC derivatives notional outstanding totalled $598.4 trillion at the end of December 2021, 2.8% higher compared to year-end 2020 and 1.9% lower compared to mid-year 2021, according to the latest data from the Bank for International Settlements (BIS), as reported by ISDA. However, some of this change reflects a seasonal pattern, whereby notional outstanding tends to increase in the first half of the year and decline in the second half.

The gross market value of OTC derivatives contracts for at the end of 2021 was 21.2% lower compared to year-end 2020, and 1.4% lower versus mid-year 2021. Gross credit exposure (e.g., gross market value after netting) also decreased by 24.7% over the year, although most of the decline occurred in the first half, with a loss of 6.6% in H2.

Market participants reduced their mark-to-market exposure by about 79.6% at year-end 2021 due to close-out netting. “This credit exposure is further reduced by the collateral that market participants post for cleared and non-cleared derivatives transactions,” pointed out BIS.

Overall, firms posted $323.4 billion of initial margin (IM) for cleared interest rate derivatives (IRD) and single-name and index credit default swaps (CDS) at all major central counterparties (CCPs) at year-end 2021. The 20 largest market participants (phase one firms) collected $286 billion of IM for their non-cleared derivatives transactions at year-end 2021.