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Crystal ball

Experts predict shift to centrally cleared OTC derivatives

Industry experts have predicted a transition from a bilaterally cleared OTC business to centrally cleared OTC derivatives, along with an increase in the volume of exchange-traded derivatives, according to a report from Celent.

The trading volumes of exchange-traded derivatives have fluctuated in the last few years and do not reflect the expected rise due to the move toward clearing, says the report, titled “US Derivatives Markets: Staying the Course”. This could be due to a number of reasons, including the slow implementation of the Dodd-Frank Act and the turbulent economic environment.
Volumes of OTC derivatives have held out well and do not seem to have suffered from the decline that was expected due to impending changes in the trading and clearing mechanisms. OTC forwards have risen in volume, while OTC swaps and options have shown growth between 2008 and 2011, with marginal declines in 2012.
JP Morgan Chase has been consistently trading the highest derivatives volumes in the US market. However, these have declined from USD81trn in Q1 2009 to USD72trn in Q1 2012. Similarly, the volumes for Bank of America have declined from USD77trn to USD67trn. On the other hand, the volumes for Citigroup have increased from USD31trn to USD50trn, while those for Morgan Stanley have risen from USD39trn to USD50trn. The volumes for Goldman Sachs have been stable at around USD48trn.
The breakdown of trading for the different types of derivatives shows that interest rate derivatives have constituted around 80 per cent of all derivatives by notional outstanding from Q1 2005 to Q1 2012, although their share has gone down from 85.6 per cent in Q1 2005 to 80.6 per cent in Q1 2012. The share of FX derivatives has risen from 9.3 per cent to 11.8 per cent, while that of credit derivatives has risen from 3.4 per cent to 6.2 per cent.
The total credit exposure for all commercial banks and trust companies in the US has declined from USD1.7trn in Q1 2007 to USD1.1trn in Q1 2012. Hence, there has been a significant reduction in the credit exposure levels over the last five years for the derivatives banking industry. But there has been a rise in the ratio of total credit exposure to risk capital over the period from Q1 2005 to Q1 2011, and it is still much higher than its pre-crisis levels. The total credit exposure for leading banks has declined for JP Morgan, Bank of America, and Goldman Sachs, while it has risen between Q1 2008 and Q1 2012 for Citibank. This is broadly in line with our expectations because the total derivatives' trading for Citibank has gone up by almost 60 per cent during the period.
The average quarterly industry revenue between Q1 2007 and Q1 2012 was the highest for interest rate derivatives at USD2.1bn, which is not surprising when we consider that these constitute around 80 per cent of all derivatives trading by notional outstanding. Interestingly, though, the average revenue for FX derivatives in this period is around USD1.9bn, which is close to the average revenue of for interest rate derivatives.

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