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Global over-the-counter (OTC) derivatives markets have shifted significantly, with a surge in commodity derivatives and benchmark reforms reshaping interest-rate derivatives, according to data from the Bank for International Settlements (BIS).

The BIS reported that both the notional amount and gross market value of OTC derivatives declined in the second half of 2021. However, certain market segments changed notably.

For instance, the gross market value of commodity derivatives jumped by 30% in the second half of 2021 amid rising commodity prices.

“The increase was driven mainly by derivatives on commodities other than precious metals,” the BIS said. “This went hand in hand with notable rises in food and energy prices in 2021 during the rapid economic recovery after the pandemic.”

At the same time, the replacement of Libor with new risk-free rates also reshaped the landscape for interest-rate derivatives, the BIS noted. The shift to backward-looking, overnight risk-free rates led investors to turn away from forward rate agreements (FRAs) in favour of interest rate swaps, which are an “imperfect replacement” for FRAs.

“The notional amount of forward rate agreements contracted sharply in the second half of 2021, as investors prepared for Libor benchmarks to be phased out at the year-end,” the BIS said.

For example, forwards denominated in Swiss francs and sterling both dropped by 77% in the second half of 2021, the BIS reported.

At the same time, the notional amount of rate swaps jumped.

For instance, swaps denominated in U.S. dollars rose by US$14 trillion in the second half of 2021, largely offsetting the US$19-trillion drop in dollar-denominated forwards.

Additionally, strong demand for derivatives to manage interest-rate risks “against an outlook for higher inflation and expectations of future rate hikes” may have also driven the increases in rate swaps, the BIS said.

Overall, the notional value of outstanding derivatives slipped modestly in the second half of 2021 to US$600 trillion from US$610 trillion.

Similarly, the gross market value of derivatives declined slightly in the second half to US$12.4 trillion, and gross credit exposure contracted too. The small decrease mainly came from interest rate derivatives, the BIS said.