The latest statistics from the Bank for International Settlements shows an overall contraction in the global over-the-counter derivatives market, despite a large increase in market values.

The BIS reports that, in the first half of 2010, positions of all types of OTC derivatives fell by 4% to US$583 trillion, following the 2% increase in the second half of 2009. “The decline occurred against the backdrop of deteriorating market sentiment related to the European sovereign debt crisis,” it says. “However, much of the contraction reflected a valuation effect due to the depreciation of European currencies against the US dollar, the currency in which the data are reported.”

In contrast to the decline in the positions, gross market values for existing OTC contracts rose by 15% to $25 trillion at the end on June due to sharp asset price movements, the BIS says.

In the three years since the last triennial survey, OTC derivatives positions were up 15% (or 5% annualized), the BIS notes, but this represents a much slower pace than during the previous period from 2004 to 2007, where growth was 131%, or 32% per year.

“The modest overall growth in notional amounts outstanding hides significant variations across risk categories,” the BIS says. It reports that the highest growth was recorded in the interest rate segment (up 25%), positions in foreign exchange derivatives went up by 9%, but amounts outstanding in other OTC segments declined substantially, ranging from 30% and 40% (equity and credit) to 60% (commodity contracts).

Notional amounts outstanding of credit default swaps declined for the fifth consecutive semiannual period, the BIS says, largely due to terminations of existing contracts. Gross market values for single-name contracts dropped by 16%, while those for multi-name contracts rose by 10%.

IE