Key Findings
- The notional amount of outstanding interest rate and FX derivatives experienced significant growth in the first half of 2023, increasing by 17% and 12% to reach $574 trillion and $120 trillion, respectively.
- The ongoing transition away from Libor benchmarks continues to reshape the landscape of interest rate derivatives, evidenced by reduced forward rate agreements in major currencies, with the exception of the euro.
- Central clearing of credit default swaps (CDS) hit a new high, with 70% of transactions cleared through central counterparties by the end of June 2023. Central clearing for interest rate derivatives has remained consistently high at around 80% since 2019.
Interest Rate Hikes Fuel Growth in Interest Rate Derivatives
The total notional value of over-the-counter (OTC) derivatives outstanding reached a substantial $715 trillion by the close of June 2023, marking a 16% increase, or $97 trillion, since December 2022. This notable surge, illustrated in Graph 1.A, can be partially attributed to typical seasonal patterns observed since 2016. These patterns often involve a year-end dip in outstanding notional amounts, followed by a rebound in the new year. Such temporary contractions may occur as reporting dealers adjust their derivative positions for regulatory compliance and financial reporting at year-end.1
However, the significant growth in outstanding interest rate derivatives (IRDs) (+ $83 trillion, or 17%) and foreign exchange (FX) derivatives (+ $13 trillion, or 12%) was the primary driver behind this overall expansion. The increase in IRDs was particularly pronounced, even when considering seasonal variations. This growth occurred against a backdrop of rising interest rates in both the dollar and euro zones. These rate hikes directly influence the valuation and activity within the interest rate derivatives market, as businesses and financial institutions adjust their risk management strategies in response to changing borrowing costs and yield curves.
The market value of outstanding OTC derivatives, which represents the sum of positive and negative market values, remained at elevated levels at the end of June 2023, showing only a slight decrease from December 2022 (Graph 1.B, red line). This persistent high market value likely reflects the rapid tightening of monetary policy and subsequent interest rate increases that began in 2022. These rate hikes have particularly inflated the gross market value of IRDs. A dramatic 70% surge in 2022 pushed the gross market value of IRDs to $14.6 trillion by year-end, a peak unseen in the previous six years (Graph 1.B, yellow line). While it slightly decreased from this peak by June 2023, it remained at a historically high level.2 Both euro- and US dollar-denominated IRDs contributed to this trend, as depicted in Graph 2 (blue and red lines). This highlights the interconnectedness of global interest rate movements and their impact on derivative valuations.
Libor Transition Reshapes Interest Rate Derivative Products
The ongoing reform of benchmark Libor rates is fundamentally changing the product composition within the IRD market. Notably, it has led to substantial declines in the notional value of outstanding forward rate agreements (FRAs) denominated in several major currencies.3 Following the cessation of Libor rates for GBP, JPY, and CHF at the end of 2021, the outstanding notional amounts of FRAs in these currencies plummeted (Graph 3.A). For the US dollar, the overnight and 12-month Libor settings were discontinued at the end of June 2023, with the remaining one-, three-, and six-month settings scheduled to cease in September 2024.4 Reflecting this transition, dollar-denominated FRAs stood at $14 trillion by the end of June 2023, significantly lower than pre-reform levels (Graph 3.A, red line).
In contrast, euro-denominated FRAs, which typically reference Euribor (a benchmark that has not been phased out), have shown an upward trend throughout the Libor transition period, reaching $43 trillion by the end of June 2023 (Graph 3.A, blue line). This is the highest level ever recorded, indicating a shift towards Euribor-based products as Libor alternatives are adopted.
Examining interest rate swaps (IRS), their notional outstanding amounts showed divergent trends across different currencies in the first half of 2023.5 Dollar-denominated IRS rebounded to the elevated level of $168 trillion observed a year prior, while euro-denominated IRS continued its upward trajectory, reaching nearly $130 trillion. Conversely, JPY-denominated IRS resumed a downward trend that has been apparent since at least 2016, while IRS denominated in GBP and CHF remained relatively stable. These currency-specific trends reflect varying economic conditions and monetary policies across different regions.
Central Clearing Trends in Derivatives
The rate of central clearing for credit default swaps (CDS) has continued its upward trend, reaching 70% by the end of June 2023. This marks a record high and represents an increase of more than 4 percentage points from the previous year (Graph 4, blue line).6 This increased central clearing reduces counterparty risk and enhances the overall stability of the financial system. However, the clearing rate for CDS still remains below that of IRDs, which has been consistently above 75% in recent years (reaching 78% at the end of June 2023). The central clearing rate for FX derivatives has remained below 5%, despite a steady increase over the last decade (Graph 4, yellow line). This suggests that there is still room for growth in central clearing for CDS and particularly for FX derivatives.
Annex
1 For further information on possible factors behind such intra-year effects, see OTC derivatives statistics at end-December 2019 (bis.org).
2 The gross credit exposure measure – which adjusts gross market values for legally enforceable bilateral netting agreements (but not for collateral) – decreased slightly, by 1%, to $3.6 trillion. https://stats.bis.org/statx/srs/tseries/OTC_DERIV/H.H.A.A.5J.A.5J.A.TO1.TO1.A.A.3.C?t=d5.2&c=&p=20231&i=63.8
3 See W Huang and K Todorov, “The post-Libor world: a global view from the BIS derivatives statistics“, BIS Quarterly Review, December 2022.
4 They are currently calculated using a synthetic methodology based on the relevant CME Term SOFR plus the respective International Swaps and Derivatives Association fixed spread adjustment. See ICE LIBOR for details.
5 FRAs reference forward-looking term rates and pay out at the start of an interest period, to mitigate credit risk. Single-period IRS reference backward-looking rates and pay out at the end of a period.
6 This was mainly driven by multi-name contracts (Annex Graph A.6).
