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The evolution of OTC interest rate derivatives markets

Author

Listed:
  • Torsten Ehlers
  • Bryan Hardy

Abstract

The trading of interest rate derivatives in over-the-counter (OTC) markets more than doubled between 2016 and 2019, significantly outpacing the growth of trading on exchanges. This rapid expansion was driven by three factors. First, non-market facing trades, such as back-to-back deals and compression trades, increased and were more comprehensively reported in the BIS Triennial Survey. Second, technological developments reduced transaction costs in OTC markets and spurred trading, including more trading by investment funds. And third, changing expectations about US short-term interest rates fuelled hedging and speculative activity. In general, structural developments like clearing, compression and automation remade OTC markets so that they more closely resembled exchanges and led to a relative shift in trading from exchanges to OTC markets. Further market changes due to benchmark rate reforms may be on the horizon.

Suggested Citation

  • Torsten Ehlers & Bryan Hardy, 2019. "The evolution of OTC interest rate derivatives markets," BIS Quarterly Review, Bank for International Settlements, December.
    • Handle: RePEc:bis:bisqtr:1912i
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    References listed on IDEAS

    as
    1. Jacob Gyntelberg & Christian Upper, 2013. "The OTC interest rate derivatives market in 2013," BIS Quarterly Review, Bank for International Settlements, December.
    2. Torsten Ehlers & Egemen Eren, 2016. "The changing shape of interest rate derivatives markets," BIS Quarterly Review, Bank for International Settlements, December.
    3. Dietrich Domanski & Leonardo Gambacorta & Cristina Picillo, 2015. "Central clearing: trends and current issues," BIS Quarterly Review, Bank for International Settlements, December.
    4. Sirio Aramonte & Wenqian Huang, 2019. "OTC derivatives: euro exposures rise and central clearing advances," BIS Quarterly Review, Bank for International Settlements, December.
    5. Bellia, Mario & Girardi, Giulio & Panzica, Roberto & Pelizzon, Loriana & Peltonen, Tuomas, 2024. "The demand for central clearing: To clear or not to clear, that is the question!," Journal of Financial Stability, Elsevier, vol. 72(C).
    6. Lawrence L Kreicher & Robert Neil McCauley, 2016. "Asset managers, eurodollars and unconventional monetary policy," BIS Working Papers 578, Bank for International Settlements.
    7. Nikhil Patel & Dora Xia, 2019. "Offshore markets drive trading of emerging market currencies," BIS Quarterly Review, Bank for International Settlements, December.
    8. Christian Upper, 2006. "Derivatives activity and monetary policy," BIS Quarterly Review, Bank for International Settlements, September.
    9. John Hull, 2014. "The changing landscape for derivatives," Journal of Financial Engineering (JFE), World Scientific Publishing Co. Pte. Ltd., vol. 1(03), pages 1-8.
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    Citations

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    Cited by:

    1. Scheicher, Martin, 2023. "Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020," ESRB Occasional Paper Series 24, European Systemic Risk Board.
    2. Philip Wooldridge, 2019. "FX and OTC derivatives markets through the lens of the Triennial Survey," BIS Quarterly Review, Bank for International Settlements, December.
    3. Sirio Aramonte & Wenqian Huang, 2019. "OTC derivatives: euro exposures rise and central clearing advances," BIS Quarterly Review, Bank for International Settlements, December.
    4. Xiaoxi Liu & Jinming Xie, 2023. "Forecasting swap rate volatility with information from swaptions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 43(4), pages 455-479, April.
    5. Wenqian Huang & Karamfil Todorov, 2022. "The post-Libor world: a global view from the BIS derivatives statistics," BIS Quarterly Review, Bank for International Settlements, December.
    6. Nikhil Patel & Dora Xia, 2019. "Offshore markets drive trading of emerging market currencies," BIS Quarterly Review, Bank for International Settlements, December.
    7. Orlov, Alexei G. & Sharma, Rajiv, 2024. "Which witch is which? Deconstructing the foreign exchange markets activity," Global Finance Journal, Elsevier, vol. 60(C).
    8. Vikranth Lokeshwar Dhandapani & Shashi Jain, 2024. "Neural Networks for Portfolio-Level Risk Management: Portfolio Compression, Static Hedging, Counterparty Credit Risk Exposures and Impact on Capital Requirement," Papers 2402.17941, arXiv.org.

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    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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