Bloomberg News

Derivative Trade Tear-Ups Cut $48.7 Trillion in 2012, ISDA Says

June 20, 2013

Derivatives traders eliminated $48.7 trillion of contracts in the over-the-counter derivatives market last year amid efforts to curb risk by tearing up duplicative trades, according to the International Swaps and Derivatives Association.

Traders have cut $214.3 trillion of notional value in offsetting contracts during the past five years in the privately negotiated market, the New York-based industry lobby group said today in a statement.

Banks, hedge funds and asset managers in the U.S. are adapting to changes mandated by the 2010 Dodd-Frank Act, including a requirement to process most swaps with a clearinghouse to cut the risk that the failure of a major counterparty in the market triggers a cascade of losses. At year-end, the notional value of contracts outstanding was $565.2 trillion, up from $529.7 trillion in 2007, according to ISDA.

“The industry has made great strides to reduce counterparty credit risk and help make the derivatives markets safe and efficient through netting, collateralization, portfolio compression and central clearing,” Robert Pickel, ISDA chief executive officer, said in the statement. “While the increase in compression continues to impact adjusted OTC derivatives volumes, underlying market activity remains robust.”

About $173.2 trillion of OTC derivatives were cleared by the end of last year, including 54 percent of all interest-rate derivatives, ISDA said. Clearing increases the market’s size because one bilateral trade is broken into two cleared trades, ISDA said. Adjusting for that, the notional value of outstanding OTC derivatives, excluding foreign exchange contracts, fell 10.9 percent at the end of last year from year-end 2011, ISDA said.

To contact the reporter on this story: Mary Childs in New York at mchilds5@bloomberg.net

To contact the editor responsible for this story: Alan Goldstein at agoldstein5@bloomberg.net


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