Almost $230 trillion in notional value of interest-rate and credit-default swaps have been eliminated from the over-the-counter derivatives market by canceling offsetting trades, according to the International Swaps & Derivatives Association.
So-called tear-up agreements are used to get rid of redundant trades in the privately negotiated market, helping reduce credit risk by paring the number of transactions that must be accounted for on a daily basis. During the first half of 2012, rate swaps were reduced by $25.7 trillion while $2.5 trillion net of credit-default swaps were compressed, ISDA said in a statement yesterday.
“Outstanding OTC derivatives volumes continue to be impacted by two key industry initiatives, compression, which reduces notional amounts outstanding, and clearing, which increases outstanding volumes,” Robert Pickel, ISDA’s chief executive officer, said.
Regulators are seeking to migrate over-the-counter trading of derivatives to recognized exchanges or central clearinghouses in order to increase transparency, reduce risk and help improve financial stability. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
Adjusted volumes of OTC derivatives fell by 5.3 percent from the end of 2011 to $416.9 trillion as of June 30, ISDA said. Adjusted volumes for interest rate derivatives products, which includes interest rate swaps, forward rate agreements and interest rate options, fell 5.8 percent to $341.2 trillion, according to the statement.
Clearinghouses have begun to clear significant volumes of forward rate agreements, according to ISDA. As of June 30, there were $64.3 trillion of forward rate agreements outstanding and 43.2 percent of the market was cleared, up from 2.8 percent at the end of 2011.
ISDA is the trade and lobbying group for users of OTC derivatives.