What are derivatives 6


Inventory in absolute numbers, worldwide 1993 to 2016

Source: Bank for International Settlements (BIS): Exchange-traded derivatives statistics, Semiannual OTC derivatives statistics
License: cc by-nc-nd / 3.0 / de /

Since the beginning of the century, trading in financial derivatives has expanded by leaps and bounds. This applies to the derivatives traded on regulated exchanges and even more so to the so-called OTC derivatives, which are traded directly between market participants (OTC = over the counter). Since the global financial and economic crisis of 2008/2009, the development has been less expansive or has even declined in the case of OTC derivatives. In 2016, the face value of exchange-traded derivatives was $ 67.2 trillion (2007: $ 71.5 trillion). Due to changes in the legal framework for financial derivatives, trading in OTC derivatives fell from 710 to 483 trillion US dollars between 2013 and 2016 (2007: 586 trillion US dollars).


In relation to the exchange-traded financial derivatives - or more precisely to the underlying assets (underlyings) of the financial derivatives - the portfolio increased more than sixfold between 1997 and 2007. The so-called nominal value of the derivatives was 71.5 trillion US dollars at the end of 2007, well above the value of all stocks in the world (2007: 60.7 trillion US dollars). The year 2007, however, marked a clear turning point in the development. As a result of the highly speculative trading in derivatives, extensive credit risks have been spread across a large number of financial institutions worldwide, which is why trading in mispriced derivatives is the main cause of the global financial and economic crisis. After a significant slump in market activity in 2008, the peak value of 2007 has not yet been reached again. For the end of 2016, the Bank for International Settlements again determined a value of 67.2 trillion US dollars, but exchange trading in derivatives remained well below the value at 6.7 trillion US dollars per trading day of 2007 ($ 11.5 trillion).

Exchange-traded derivatives are traded on futures exchanges. The currently largest futures exchanges are the CME Group (Chicago Mercantile Exchange), the Intercontinental Exchange Atlanta and the European Exchange (EUREX) based in Frankfurt am Main. In on-exchange trading, the contractual partner is always the clearing house, which also checks the creditworthiness of the business partners (counterparties) and guarantees that the contractual conditions are met. The financial products traded on futures exchanges are standardized, with futures and options in particular being traded. Trading in futures increased by a good fourfold between 2000 and 2016 and trading in options was around eight times as large in 2016 as in 2000. In relation to 2007, however, the values ​​for 2016 in both categories are clearly below the values before the financial crisis.

The stock of OTC derivatives is much larger than the stock of exchange-traded derivatives. In contrast to standardized exchange-traded derivatives, OTC transactions can be structured according to the needs of the contracting parties. Important over-the-counter types of derivatives are forwards, OTC options, and swaps. The notional value of OTC derivatives reached its all-time high of $ 710.3 trillion in 2013. This was more than seven-fold compared to the year 2000 and exceeded the nominal value of the derivatives traded on the stock exchange by more than twelve-fold. In contrast to the derivatives traded on the stock exchange, the financial crisis initially only weakened the growth of the market.

Due to the lack of transparency in off-exchange derivatives trading, legislators have decided to take regulatory measures that restrict trading in OTC derivatives. Mandatory central clearing for standardized contracts has been introduced in the USA (Dodd-Frank Act) and in Europe (EMIR - European Market Infrastructure Regulation), and banks are also required to have higher capital requirements for contracts that are not centrally cleared. As a result of these regulatory measures, trading in OTC derivatives fell from $ 710.3 trillion to $ 482.9 trillion between 2013 and 2016.

Data Source

Bank for International Settlements (BIS): Exchange-traded derivatives statistics, Semiannual OTC derivatives statistics

Terms, methodological notes or reading aids

Financial derivatives or derivative financial instruments are forms of investment that are each derived from an underlying asset. Underlying values ​​for derivative transactions can be commodities, financial values ​​and market-related reference values ​​of all kinds (for example foreign exchange, bonds, securities, interest rates, indices). Derivatives are constructed in such a way that they track the price fluctuations of the underlying assets disproportionately. Therefore, they can be used both to hedge against loss of value and for speculation. It is used between derivatives traded on regulated exchanges and OTC derivatives (OTC = over the counter), which are traded directly between the market participants.

The statements made here about the holdings of and trading in derivatives relate to the Face value of derivatives. The nominal value results from the rates or prices of the underlying assets.

Due to the large number of different variants and mixed forms, a precise classification of derivatives is difficult. However, three major groups of derivatives can be distinguished: As Futures (exchange-traded) or forwards (over-the-counter) are financial futures transactions that set a mandatory trade at a specified time and price and originally served to limit price risks. The second group are them so-called Options. These are conditional forward transactions in which the buyer acquires the right to buy something at a later date at an agreed price (call option) or to sell something (put option). The option holder can decide unilaterally whether to exercise the option or to allow it to lapse. In the third group, the so-called Swap transactions, trading partners exchange debt securities with different interest rates, currencies and maturities. The purpose of swap transactions is to reduce financing costs.