The global over-the-counter (OTC) derivatives market experienced substantial growth in 2023, with the notional value of outstanding contracts rising by 8% year-on-year to reach $667 trillion. This increase was primarily driven by interest rate derivatives (IRDs), which grew by 8% to $530 trillion, and foreign exchange (FX) derivatives, which saw a 10% increase to $118 trillion.

OTC Derivatives Market Sees Significant Growth and Shifts in 2023

According to the newest report by the Bank of International Settlements (BIS) the market exhibited a seasonal saw-tooth pattern, with notional outstanding amounts growing by 15% in the first half of the year before contracting by 6% in the second half.

Despite this fluctuation, the overall growth rate of 8% marked the highest annual increase since 2017. The results align with those from the report six months ago, when BI last updated information on OTC derivatives.

“The year-on-year (yoy) change, where seasonal patterns are not evident, shows significant growth of $49 trillion, or 8%,” BIS commented.

The gross market value of outstanding OTC derivatives, which sums positive and negative market values, declined by 13% in 2023. This decrease was largely attributed to the IRD component, which had previously reached a recent high at the end of 2022 due to rapid dollar interest rate tightening. As the pace of rate tightening slowed in 2023, the market value of IRDs subsequently declined.

Foreign Exchange Derivatives Grow, Driven by US Dollar Contracts

FX derivatives experienced significant growth in 2023, particularly in the first half of the year. This rise was mainly driven by contracts involving the US dollar, which serves as the vehicle currency in FX markets.

“These developments represent a continuation of the trends observed since the mid-2010s,” the BIS commented.

Since 2016, outstanding positions in FX derivatives have surged by 50%, mainly driven by a higher volume of contracts involving the US dollar, euro, and other currencies.

Central Clearing Trends Diverge Across Risk Categories

Trends in the central clearing of derivatives showed variation across different risk categories in 2023. The proportion of centrally cleared IRDs and FX derivatives stayed relatively stable at 76% and 5%, respectively.

However, the share of centrally cleared credit default swaps (CDS) declined from 70% to 65% in the second half of the year. This decrease occurred alongside a significant 14% reduction in outstanding CDS positions during the same period.

“The driving factor was the drop in dealer banks' positions with ‘other financial institutions’ which comprise mainly central counterparties but also non-bank financial institutions and non-reporting banks,” the BIS explained.

A few months ago, the BIS Innovation Hub announced several new projects for 2024, following the completion of 12 projects in 2023 and eight more still in progress. These new initiatives will focus on artificial intelligence (AI), cybersecurity , combating financial crime, central bank digital currencies, and green finance.

In its latest report, the European Central Bank (ECB) also emphasized the importance of monitoring AI in the financial sector. The ECB suggested that regulatory measures might be needed to address possible market failures.