History enthusiasts may have heard of the Code of Hammurabi, an early legal text from ancient Mesopotamia, carved into a stone slab about 3,700 years ago. The code covers everything from property rights to divorce, but it also recognizes the risk and uncertainty that can exist in economic exchanges and sets out a mechanism for that risk to be transferred and shared. It shows that risk mitigation techniques have been around since the dawn of recorded civilization. Whenever trade has occurred between groups of people, tools have existed to allow them to alleviate uncertainty, transfer risk and enhance profitability. Those tools have evolved significantly over the centuries, but the basic concepts remain unchanged – and they continue to be applied by companies and governments around the world for one simple reason: they are valuable.

It’s sometimes easy to lose sight of this fact – even among those of us who spend our lives working in the derivatives industry. Which is why ISDA has marked its 40^th anniversary by publishing a major new report exploring how and why different types of entities – from multinational companies to pension funds to governments – use derivatives.

This is not a niche market – the report shows that derivatives are used widely around the world. Based on analysis of nearly 1,200 companies across seven major stock indices, 87% use derivatives to help manage their business.

These companies use derivatives for a variety of reasons – from risk transfer, to liquidity management, to bolstering returns. They help create certainty by enabling firms to lock in financing terms, reduce costs, dampen the impact of market volatility and enhance financial performance. This allows companies to plan confidently and make strategic investments, contributing to business expansion and economic growth.

To give an example, an academic study of almost 7,000 firms in 47 countries found that companies using derivatives had lower cashflow volatility, reduced financing costs, higher returns and greater investment capacity. Another study of over 14,000 companies showed those using derivatives to manage interest rate risk on their variable-rate debt faced smaller declines in equity value after rate hikes.

Every day, manufacturers use interest rate swaps to lock in predictable debt costs. Exporters use FX forwards to secure stable conversion rates when receiving overseas revenues. Pension funds employ swaps, swaptions and options to shield retirement assets from shifts in market prices and to augment returns. And mortgage providers use swaps and options to manage interest rate and prepayment risks to keep home financing widely accessible.

From their earliest uses as a tool to create certainty over the future price of a sale of crops in the second millennium BC, derivatives have evolved to become an essential component of any robust, vibrant and competitive economy. It’s critical that corporations and governments can continue to access derivatives markets seamlessly and with as little friction as possible, which is why our mission to foster safe and efficient derivatives markets remains as relevant today as it was when ISDA was first established 40 years ago.

Read the new report on the value of derivatives here.

This issue will be discussed at the ISDA Annual General Meeting in Amsterdam on May 13-15. Click here to book your ticket.