Derivatives trading shrinks on weak dollar

Tim Wallace
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THE GLOBAL derivatives market shrank for the second consecutive six-month period in the first half of 2012, and continued the downward trend experienced since the start of the financial crisis, according to figures out yesterday from the Bank of International Settlements.

The total notional amounts of over the counter (OTC) derivatives outstanding fell to $639 trillion (£402 trillion) at the end of June, down one per cent on the year.

In part that came from the appreciation of the US dollar over the six months to June, as well as a continued trend for trade compression – the practice of netting out contracts between counterparties so each has the same amount of coverage and exposure but in fewer overall contracts.

But the period also saw a two per cent drop in interest rate contracts and a six per cent fall in credit derivatives. The Swiss National Bank’s cap on the value of the Swiss franc increased market certainty for that currency and pushed down volumes of related derivatives by 24 per cent.

But overall foreign exchange contracts outstanding rose five per cent to $67 trillion as not all markets hold such certainty.