Who says macroprudential regulation doesn't work: according to the BIS, notional amounts of outstanding OTC derivatives contracts fell by 3% to "only"
$691 trillion at end-June 2014. This is also roughly equal to the total derivative notional outstanding just before the Lehman collapse, when global central banks volunteered taxpayers to pump a few trillion in capital to meet global variation margin calls. Clearly the system, in the immortal words of Jim Cramer, is "fine."
From the BIS:
The contraction in aggregate notional derivatives positions was largely driven by the interest rate segment. Notional amounts of interest rate derivatives contracts stood at $563 trillion at mid-2014, about $20 trillion below the volume recorded at end-2013. Outstanding volumes of interest rate swaps fell by 8% to $421 trillion... The contraction in swap positions was partly offset by rising activity in the forward rate agreement segment, where notional contract volumes expanded by 17% to $93 trillion. Outstanding amounts of fixed income options, by contrast, remained largely unchanged.
None of that is a surprise. One place, however, where a brand new source of systemic risk and contagion has emerged, is the massive shift away from dealer counterparties to "other" financial institutions as counterparties. In percentage terms, this has soared from under 50% around the time Goldman crushed its biggest fixed income competitor, Lehman Brothers, to just over 75% today.
The distribution of interest rate derivatives by counterparty points to a continued shift in activity towards financial institutions other than dealers right-hand panel). Contracts between dealers and other financial institutions stood at $463 trillion at end-June 2014, or 82% of all contracts, up from about one half at end-2008. A potential driver could be the increased use of derivatives by asset management firms and a general shift away from the traditional dealer-centric market structure. That said, the trend towards central clearing of OTC contracts also plays an important role, as it may overstate growth in notional amounts for other financial institutions. Once a trade between a dealer and its counterparty is novated to the central counterparty (CCP), it becomes two outstanding contracts with the CCP.
Or it just may indicate that traditional banks are getting the hell out of the derivative dealing market (see Deutsche Bank and CDS) for reason that will soon become apparent. In the meantime, none of this should be of concern to anyone: after all the S&P just had an uptick from its all time highs, so clearly all is centrally-planned, er, well.
