Says OTC and Exchange-Traded Derivatives Trading are a Global Risk Transfer Market with $700 Trillion of Notional Values Outstanding and $3.7 Quadrillion of Annual Notional Turnover in 2010
Forecasts Exchange-Traded Derivatives (ETDs) in 2010 Will Represent 55% of Total Combined Notional Turnover
Moving $42 trillion of the most vanilla, customer-to-dealer interest rate swaps (IRS) to centralized clearing will necessitate as much as $240 billion in immediate collateral requirements, says TABB Group in new research published today. Moreover, requiring all OTC derivatives (OTCDs) to be centrally cleared would require additional collateral of as much as $2.2 trillion, according to the report.
E. Paul Rowady Jr., senior analyst and author of the report, "The Global Risk Transfer Market: Developments in OTC and Exchange-Traded Derivatives," says, "Over–the-counter and exchange-traded derivatives (ETDs) are actually two interdependent, complementary, sometimes competitive 'siblings' within a single, global risk-transfer mechanism. In total, this is a market serving the risk management needs of all participants for all use cases, in what TABB has named the Global Risk Transfer Market (GRTM)."
TABB estimates that the GRTM will represent a $700 trillion marketplace with $3.7 quadrillion in annual turnover by the end of 2010. According to Rowady, one of the underappreciated aspects of the GRTM today is that total ETD activity, not OTCDs, consistently represents a majority (currently 55%) of total combined annual notional turnover, or over $2 quadrillion for 2010. Furthermore, with estimated open interest of $80 trillion, the ETD market sees a turnover rate of 25 times per year, as compared to turnover rates of 2 to 3 times for the OTCD market.
Despite all the attention on the complex world of OTCDs since the beginning of the credit crisis in 2008, the resulting level of misunderstanding continues to be unsatisfactory, uninformed – or both – which is why TABB believes that the OTCD market should not be viewed as a $600 trillion behemoth, but as a key component of a broader risk transfer mechanism for global financial firms, corporations and investment managers.
The 78-page report with 72 highly detailed exhibits, commissioned by the World Federation of Exchanges, is an in-depth and unprecedented comparative analysis of the OTC and exchange-traded derivative markets. Content focuses on market sizing, trade costs (collateral, clearing, exchange fees and bid-ask spreads) as well as analyses covering interest rate derivatives (IRD), credit default swaps (CDS) and other major asset classes.
Drawing on one-to-one interviews with 28 market participants (top-tier and emerging dealers, traditional buy-side firms and hedge funds, corporate end users, exchanges and clearinghouses, inter-dealer brokers and OTC execution venues, and data providers and aggregators), the report examines anticipated stakeholder impacts of current regulatory reforms for each group, from pre-trade, execution and clearing, to post-trade and reporting/data services.
A sampling of the 72 exhibits includes:
- Total notional turnover for OTCD and ETD (2010e)
- Percentage of collateralized OTC trade exposures (2003–2010e)
- Bid-Ask spread comparison for OTCD and ETD
- Reform impacts and stakeholder sentiment
- Annualized turnover frequency ranking of all derivative markets (2009)
- OTCD and ETD notional turnover by region (2004-2010e)
- Corporate use of OTCD by asset class
- Growth of collateral in the OTCD market (1999-2009)
- OTCD margin requirement current versus additional collateral (2005-2009)
- Comparison of transaction costs for average contracts – clearing and execution venue costs
The report is available for immediate download by all TABB Research Alliance Derivatives clients and pre-qualified media at https://www.tabbgroup.com/Login.aspx. For an executive summary or to purchase the report, please visit http://www.tabbgroup.com, or write to info@tabbgroup.com.
Other recent derivatives research from TABB Group includes: The Future of OTC Derivatives: Swap Execution Facilities and the New Dealer; OTC Valuation Services: How You Know If the Price is Right; Trading in Asian Derivatives: Opportunities Near and Far; The Alternative Emerging Market: Equity Swaps and Synthetic Prime; : European Derivatives 2010: The Buy-Side Perspective on Equity Options, Futures and Swaps; Centrally Cleared CFDs: The Buy-side Perspective; and US Electronic Options Trading 2010: Algorithms, DMA and Crossing Networks.
About TABB Group
TABB Group is the financial industry's only strategic advisory and research firm focused solely on capital markets. Founded in 2003 and based on the proven interview-based research methodology of "first-person knowledge" developed by founder Larry Tabb, TABB Group analyzes and quantifies the investing value chain from the fiduciary, investment manager, broker, exchange and custodian, helping senior business leaders gain a truer understanding of financial markets issues. For more information, visit www.tabbgroup.com. In January 2010, TABB Group launched TabbFORUM, the online community currently with over 5,000 capital markets members, drawn from buy side and sell side firms, exchanges, regulatory agencies, academia, vendors and media, focusing on thought leadership issues covering current industry-wide topics.
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