In early December, the Bank for International Settlements released the second part of its triannual survey –– the latest statistics on positions in the global over the counter (OTC) derivatives market. These comprise the preliminary results of the second part of the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity as well as the regular semiannual OTC derivatives statistics.
For the first time, the BIS also published measures of dealer concentration in various derivatives markets, taken from the regular semiannual statistics. The triennial survey covers market participants in 44 jurisdictions.
However, both surveys cover the estimated amounts outstanding and gross market values of foreign exchange, interest rate, equity and commodity derivatives traded in OTC markets. Furthermore, they both refer to the worldwide consolidated positions of reporting dealers.
The first part of the survey was published on Sept. 28 and covered turnover in traditional foreign exchange markets and OTC currency and interest rate derivatives markets. The final results on turnover and amounts outstanding in foreign exchange and OTC derivatives markets will be published in spring 2005. OTC interest rate products, the largest segment of the market, expanded by 16 percent in the first half of 2004. Most of the growth came from interest rate swaps, up 15 percent. Among swaps, notional amounts increased, especially in the case of dollar- and sterling denominated contracts, up by 25 percent and 22 percent, respectively.
In currencies, activity increased in dollar-based derivatives, up by 15 percent, as well as yen-based derivatives, up by 18 percent. Business with reporting dealers was quite strong, up by 25 percent, while that with other financial institutions was up a more subdued 7 percent. Business with non financial customers decreased slightly.
Gross market values fell by 8 percent to $6.3 trillion. Over the past year the cost of replacements of overall OTC derivatives contracts fell by nearly 20 percent, thus reducing from 4.7 percent to 2.9 percent of overall notional amounts.
The Committee on the Global Financial System (CGFS) has asked the BIS to calculate and publish Herfindahl indices for OTC derivatives markets. The Herfindahl-Hirschman Index is a common measure of market concentration. It is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20 and 20 percent, the HHI is 302 + 302 + 202 + 202 = 2600.
The main indication from the Herfindahl indices for the OTC derivatives market for the end of 1998 to mid-2004 is that concentration in the main OTC derivatives markets either remained stable or increased slightly.
A second indication is that concentration levels for the larger OTC derivatives markets (measured by the outstanding estimated amounts) were lower and more stable than concentration levels in the smaller markets. A third indication, based on the concentration levels for contracts between reporting financial institutions, is that the inter-dealer market for most types of derivatives contracts has a level of concentration similar to, or slightly higher than, the overall market.
For USD, JPY, GBP, CHF and CAD denominated interest rate swaps, there was a slight increase in concentration, while concentration levels remained unchanged in the markets for EUR and Swedish kronor (SEK) swaps. For interest rate options, USD, EUR and GBP concentration levels remained largely the same but were less stable, while concentration increased for other major currencies.
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