Dispelling Myths: End-User Activity in OTC Derivatives

There is a perception among some commentators that only a small fraction of derivatives activity relates to hedging that benefits the ‘real economy’. This analysis challenges that assumption. Publicly available data published by the Bank for International Settlements reveals that 65% of over-the-counter interest rate derivatives market turnover involves an end user on one side and a reporting dealer on the other. These participants, comprising non- dealer financial institutions and non-financial customers, use derivatives primarily to hedge risks and reduce volatility on their balance sheets.

The remaining 35% of derivatives turnover activity relates to dealer market-making and the hedging of customer transactions – vital for market liquidity and the facilitation of client trades. Without this, end users would be unable to put on risk-reducing and cost-effective hedges, potentially leading to less hedging and more balance-sheet volatility.

Documents (1) for Dispelling Myths: End-User Activity in OTC Derivatives

Response on Commodity Derivatives Markets

On April 22, ISDA and FIA submitted a joint response to the European Commission’s (EC) consultation on the functioning of commodity derivatives markets and certain aspects relating to spot energy markets. In addition to questions on position management, reporting and...

Episode 50: The Value of Derivatives

A new report from ISDA shows that companies all over the world use derivatives to alleviate uncertainty, transfer risk and enhance profitability. ISDA discusses the findings with Boston Consulting Group’s Roy Choudhury. Please view this page via Chrome to access...

ISDA/IIF Response to EC Market Risk Consultation

On February 22, ISDA and the Institute of International Finance (IIF) submitted a joint response to the European Commission’s (EC) consultation on the application of the market risk prudential framework. The associations believe the capital framework should be risk-appropriate and...

ISDA Submits Letter on Environmental Credits

On April 15, ISDA submitted a response to the Financial Accounting Standards Board’s (FASB) consultation on environmental credits and environmental credit obligations. The response supports the FASB’s overall proposals to establish clear and consistent accounting guidance for environmental credits, but...