Boom days return for derivatives
ACTIVITY on the international derivatives market rebounded to $426 trillion (£256 trillion) in the second quarter, signalling the return of risk appetite, but remained below pre-crisis levels.
According to a Bank for International Settlements (BIS) report published today, total turnover of derivatives rose by 16 per cent, mainly driven by futures and options on short-term interest rates.Turnover on short-term interest rates rose to $344 trillion, from $294 trillion.
Higher stock prices also pushed up turnover of equity index derivatives, although the number of contracts traded went up only slightly.
However, also in the quarterly report, BIS chief economist Steve Cecchetti warned that over-the-counter markets for derivatives are still not transparent enough and pose “major systemic risk” to the financial system.
Cecchetti said that a wider use of central counterparties (CCPs) for over-the-counter derivatives has the potential to improve market resilience and transparency. He argues that this would prevent institutions taking on large exposures that they are unable to handle in another financial crisis.