Back in November, ISDA released an industry publication of essential principles on both the adequacy and structure of central counterparty (CCP) loss-absorbing resources.
In its most recent assessment, two key policy goals of increased clearing and portfolio compression were achieved by the derivatives industry. This included a recent rise of compression volumes that helped erode in publicly reported interest rate derivatives notional outstanding figures.
Furthermore, the Bank for International Settlements (BIS) released a statement that interest rate derivatives gross notional outstanding had declined from $584.4 trillion in December of 2013 to $563.3 trillion in June 2014, characterized by a decrease of -3.6%.
The BIS conducted an over-the-counter (OTC) derivatives markets survey back in November as well, finding that OTC derivatives markets suffered from a contraction in the H1 2014. As was the case of many asset classes, including FX, volumes showed signs of stagnation.
Reason for Decline?
The deterioration of publicly reported figures can be attributed to a recent surge in compression activity, highlighted by outstanding compressed notional volume notching gains of 37.9% between December 2013 and June 2014. Overall, approximately 35.7% of the interest rate derivatives market has now been reduced through portfolio compression.
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Moreover, over two-thirds of the total interest rate derivatives market has been cleared. Controlling for the impact of clearing and compression, ISDA’s report shows that underlying interest rate derivatives market activity jumped by 5.5% between December 2013 and June 2014 as well.
According to Scott O’Malia, ISDA Chief Executive Officer, in a recent statement on the analysis, “Clearing and compression are becoming increasingly prevalent, which is a very positive development for the derivatives industry.
These two practices can make it difficult to get a clear picture of the underlying market, however. Our research shows activity in interest rate derivatives before clearing and compression has been growing.”
Long-term, BIS notational outstanding volume, coupled with ISDA’s adjusted figures have increased by similar amounts – this corresponds to a jump of 11.7% during the same time interval, with a margin of 13.3% post adjustment for clearing and compression.
The interest rate derivatives market itself, boasting a 69.3% clearing rate (amounting to $230.6 trillion) has come on the back end of mounting proportions of cleared trades in recent years.
“Increased clearing and compression are important policy goals for regulators, and significant progress has been made in achieving both of them. Close to 70% of the total interest rate derivatives market is now cleared, and compression activity is catching up fast following a big increase in volumes last year.
We expect both these trends to continue as clearing services and mandates expand and compression technology continues to develop,” added Mr. O’Malia.