The over-the-counter derivatives business saw its first ever double digit decline in the second half of last year, according to the latest data from the Bank for International Settlements.

The BIS reports that the total notional amount of OTC derivatives contracts outstanding was US$592.0 trillion at the end of December 2008, 13.4% lower than six months earlier. The decline is the first since collection of the data began in 1998, it noted.

Credit market turmoil and the multilateral netting of contracts led to a 26.9% contraction in outstanding credit default swaps, it said. The second half of 2008 also saw the first significant decline of OTC derivatives contracts outstanding in the interest rate market (8.6%) and in the foreign exchange market (21%), the BIS observed.

Despite the drop in amounts outstanding, movements of financial market prices in the second half of 2008 lifted gross market values 66.5%, to $33.9 trillion, it added. Gross market values measure the cost of replacing all existing contracts and, as such, are a better measure of market risk than notional amounts outstanding, it said.

The BIS data covers the worldwide consolidated OTC derivatives exposure of major banks and dealers in the G10 countries.

IE