OTC Derivatives Cash at Risk Dropped to $21 Trillion, BIS Says

The amount of cash at risk in the global over-the-counter derivatives market dropped at the end of 2010 as the value of interest-rate swaps declined. Overall trading totals rose 3 percent.

Banks and large investors held $601 trillion of swaps, forwards and options, up from $583 trillion as of June, the Bank for International Settlements said today. The total is on a notional basis, an amount used to calculate payments between traders. It doesn’t represent money that changed hands. If all trades had been settled, investors would have been owed $21 trillion before the effect of netting, down 14 percent from June, the Basel, Switzerland-based bank said.

The amount outstanding for contracts on interest-rates, currencies, credit-default swaps and commodities has fallen from a high in June 2008. The financial crisis exposed broad risks in the unregulated market and the September 2008 bankruptcy of Lehman Brothers Holdings Inc., one of the largest swaps dealers, made it more expensive to trade as banks and money managers feared losing other large trading partners.

The Dodd-Frank Act, passed in the wake of the credit crisis, requires most swaps to be processed by clearinghouse and traded on exchanges or similar systems. All swaps must be reported to data repositories. Capital requirements for banks and large swaps users that buy and sell those derivatives are being decided by U.S. regulators.

The OTC market total rose because of weakness in the U.S. dollar compared with the euro, Japanese yen, Swiss franc and Swedish krona, BIS said. The market data is reported in dollars, so when swaps priced in other currencies rise against the greenback it inflates the totals given to BIS, the bank said. Notional amounts of interest-rate swaps in dollars fell, while those in Euros, yen, francs and krona rose, BIS said.

Rate swaps, the largest class of OTC derivatives, rose to $364 trillion from $348 trillion. Foreign-exchange contracts, including forwards, swaps and options, climbed to $57.8 trillion from $53.1 trillion, BIS said. Credit-default swaps, which pay the buyer when borrowers fail to pay a debt, fell to $29.9 trillion from $30.3 trillion.

Derivatives are contracts whose value is derived from stocks, bonds, loans, currencies and commodities, or linked to specific events such as changes in interest rates.

To contact the reporter on this story: Matthew Leising in New York at mleising@bloomberg.net.

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net.

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