How Big is OTC

Jon, posting at the OTC space, does a nice job of setting out the size of various markets. In particular he uses gross

Westminster and Big Ben in Gold

market value rather than notional for OTCs, which is a (much) more useful measure. The results are interesting:

Scarcely a day goes by without a press article or speech mentioning in its introduction the “more $600+ trillion OTC derivatives market”. Whilst this may liven up the subject, this unnecessarily inflames concern. Here’s why.

What are the figures? The quoted figures come from the Bank for International Settlements (BIS) half yearly reporting on OTC derivatives market activity – published on their website. The latest is: BIS OTC 2012 H1 which notes $639 trillion open notional.

Because $639 trillion is way bigger than the global aggregate of almost anything (GDP, government debt, global securities issued, … etc. etc.) and is not a measure or an approximation of the value of all OTC trades outstanding.

Unlike bonds where the notional value and market value are close together (one being within a few % of the other), an on-market interest rate swap has near zero market value on trade date whereas notional could easily be $100m or more. Only through interest rate movements through the swap’s life does it acquire significant value (which can be both positive or negative). Even then the value will likely remain a very small fraction of the notional value.

ISDA produces companion half yearly figures which eliminate double counting of CCP trades (makes sense) and also all of FX derivatives (not sure I understand the rationale). The latest is: ISDA OTC 2012 H1 which notes $417 trillion adjusted open notional. This also emphasizes the point that after netting and collateral the real aggregate exposure is a tiny fraction of the notional. Whilst helpful, $417 trillion is in practice just as inflammatory as $639 trillion and it is worth further emphasizing the market value and credit exposure numbers produced.

BIS also collects gross market value as part of the survey which collects notional values. ISDA combines this with netting and collateralization effectiveness percentages it collects to estimate further credit exposures:

Comparing global market values at the same point in time i.e. end 2011, we have:

Asset class                   Market Size ($T)
Bonds                                          93
Loans                                           64
Equities                                       54
OTC Derivatives                       27
This makes one wonder about quite a lot of policy direction: to pick one example from many, shouldn’t there be a loan trade repository?

One thought on “How Big is OTC

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