[DEBATE] : (Fwd) Global financial bubble grows

[Patrick Bond]

(With annual world GDP in the $40 trillion range, this is a worry.)


TWN Info Service on Finance and Development (May08/07)

26 May 2008

Third World Network

www.twnside.org.sg





GLOBAL DERIVATIVES MARKET HITS US$596 TRILLION





The global market for over-the-counter (OTC) derivatives showed a 
relatively steady growth in the second half of 2007 - amid the turmoil 
in global financial markets - with notional amounts of all categories of 
OTC contracts rising by 15% to US$596 trillion at the end of December 
2007, following a 24% increase in the first half of the year.



This assessment is provided by the Bank for International Settlements 
(BIS) in its latest statistics released Thursday on positions in the 
global over-the-counter derivatives market. In its report, the 
Basel-based central bank for the world’s central banks said that growth 
remained particularly strong in the credit segment, where the notional 
amounts of outstanding credit default swaps (CDSs) increased by 36% to 
US$58 trillion. Expansion in the foreign exchange, interest rate and 
commodities segments was also relatively robust, recording double digit 
growth rates, while the equity segments showed a negative growth rate.



Below is a report on the BIS assessment. It was published in SUNS # 
6480, Friday, 23 May 2008.



This article is reproduced here with the permission of the SUNS. 
Reproduction or recirculation requires permission of SUNS 
(sunstwn at bluewin.ch).



With best wishes

Martin Khor

TWN





Global Derivatives Market Hits USUS$596 Trillion



By Kanaga Raja, Geneva, 22 May 2008





The global market for over-the-counter (OTC) derivatives showed a 
relatively steady growth in the second half of 2007 - amid the turmoil 
in global financial markets - with notional amounts of all categories of 
OTC contracts rising by 15% to US$596 trillion at the end of December 
2007, following a 24% increase in the first half of the year.



This assessment is provided by the Bank for International Settlements 
(BIS) in its latest statistics released Thursday on positions in the 
global over-the-counter derivatives market.



OTC derivatives market statistics provide data on notional amounts and 
gross market values outstanding of forwards, swaps and options of 
foreign exchange, interest rate, equity, commodity and credit derivatives.



(Derivatives are financial instruments whose prices are derived from the 
value of stocks, bonds, commodities, currencies, interest rates and even 
stock market indices. They are normally used to hedge against risk but 
can also be used for speculation.)



In its report, the Basel-based central bank for the world’s central 
banks said that growth remained particularly strong in the credit 
segment, where the notional amounts of outstanding credit default swaps 
(CDSs) increased by 36% to US$58 trillion. Expansion in the foreign 
exchange, interest rate and commodities segments was also relatively 
robust, recording double digit growth rates, while the equity segments 
showed a negative growth rate.



Gross market values - which measure the cost of replacing all existing 
contracts - increased by 30% and reached US$15 trillion in total at the 
end of December 2007. Gross credit exposures, after netting agreements, 
also rose by 22% to US$3.3 trillion.



The BIS report said that notional amounts of CDSs (contracts used to 
hedge against credit risks and can also be used for speculative 
purposes) continued to expand by 36% in the second half of 2007, 
although the growth rate slowed from the 49% recorded in the first half 
of the year.



At a cumulated US$6.0 trillion in the second half, multilateral 
terminations of CDS contracts almost doubled from US$3.2 trillion in the 
first half, and shaved approximately 14% off the growth rate in this market.



Growth of 40% in the notional amounts of multi-name CDSs (a contract 
where the reference entity is more than one name, as in portfolio or 
basket CDSs or CDS indices) again outpaced that in single-name contracts 
(33%).



The breakdown by counter-party showed that CDS contracts with insurance 
firms recorded a high growth rate (46%), along with contracts with banks 
and securities firms (44%), although the share of insurance firms was 
still very small (0.8% of all trades), said BIS.



Insurance firms sold US$319 billion of the protection bought, and 
purchased US$166 billion of the protection sold by the reporting 
dealers. In the second half of 2007, insurance firms showed a high 
growth rate (89%) as purchasers of the protection sold by the reporting 
dealers.



Gross market values of CDSs recorded a growth rate of 178% in the second 
half of the year, much higher than the 53% from the first half, said 
BIS, pointing out that this unprecedentedly rapid growth presumably 
reflected a substantial increase in insurance prices on CDS contracts as 
measured by CDS spreads in the second half of the year.



"This increased [the] valuation of existing CDS contracts, amid the 
turmoil in global financial markets," said the Basel-based bank.



By counter-party, CDS contracts with insurance firms expanded at the 
very high rate of 597%, followed by 225% for contracts with banks and 
securities firms.



Notional amounts of OTC foreign exchange derivatives showed a solid 
growth rate of 16% in the second half of 2007, slightly below the 21% 
recorded in the first half of the year.



By instrument, activity in outright forwards and forex swaps and 
currency swaps remained relatively robust, expanding by 19% and 17%, 
respectively, while the growth rate of options slowed to 8% from 23% in 
the first half of the year.



By currency, contracts with one leg denominated in US dollars, euros, 
Japanese yen or Swiss francs showed robust growth, ranging between 16% 
and 21%, while contracts in sterling slowed to 3%.



By maturity, contracts with maturities over five years increased 
substantially by 104%, while the growth rate of contracts with shorter 
maturities slowed significantly.



Gross market values of OTC foreign exchange derivatives in total 
recorded a high growth rate of 34% in the second half of the year, 
significantly above the first half’s 6%.



By instrument, all the categories (outright forwards and forex swaps, 
currency swaps and options) showed rates of growth higher than 30% (37%, 
32% and 34%, respectively). By currency, the euro, sterling and the US 
dollar recorded high growth rates (73%, 50% and 32%), while the Japanese 
yen showed a negative growth rate of -5%.



According to BIS, the rapid expansion in the notional amounts and gross 
market values of OTC interest rate derivatives in the first half of 2007 
(19% and 26% respectively) gave way to more moderate growth (13% and 
18%) in the second half of the year. Notional amounts outstanding and 
gross market values stood at US$393 trillion and US$7.2 trillion 
respectively at the end of December 2007.



By instrument, notional amounts of forward rate agreements grew faster 
(17%) than those of swaps (14%) or options (9%). By maturity, notional 
amounts with maturities over five years showed a much higher growth rate 
(47%) than shorter maturities. By currency, the Japanese yen and the 
pound sterling slowed to growth rates of 11% and 3% in the second half 
of the year, from 26% and 24% in the first half.



The Basel-based bank observed subdued activity in equity derivatives, 
saying that growth in the notional amounts of OTC equity derivatives 
slowed markedly from 15% in the first half of 2007 to -1% in the second, 
the first negative growth rate since the second half of 2004.



The notional amounts of OTC equity contracts stood at US$8.5 trillion at 
the end of December 2007.



The bank noted that declining notional amounts came from contracts on US 
(-7%), Japanese (-26%), European (-1%) and Latin American equities 
(-7%). This contrasted with rapidly increasing activity in derivatives 
on other Asian equities (107%).



The breakdown by instrument indicates that the notional amounts of 
forwards and swaps declined by 10%, while those of options grew by 3%. 
Gross market values of OTC equity contracts slightly increased by 2% to 
US$1.1 trillion at the end of December.



On the other hand, BIS said, the market for OTC commodity derivatives 
showed robust activity, with notional amounts increasing by 19% in the 
second half of 2007 to reach US$9.0 trillion at the end of December.



By risk category, gold showed a high growth rate of 40% in the second 
half of the year, significantly rebounding from -33% in the first half.



For commodities other than gold, forwards and swaps increased by 63% to 
US$5.6 trillion, whereas option volume declined by 25% to US$2.8 
trillion. Gross market values of commodity contracts in total increased 
by 18% to US$0.8 trillion, said BIS. +