29 апреля 2022 г.

Global Derivatives Update In a World in Flux

Thomas Krantz
Advisor to the Managing Director
Futures and options contracts have been comprehensively embedded in the global financial system since their beginnings in the 1970s. The effects continue to be transformative.

For several decades, many of the world’s futures and options business leaders have travelled to the Futures Industry Association annual March conference in Boca Raton, Florida, an event simply known as “Boca.”  When the dates for Boca were set a year earlier, no one could have imagined the event at such a time of flux in global affairs.

How much is at stake?

Futures and options contracts are traded on publicly regulated markets as well as privately.  The business transacted in private markets is far less well reported, by definition.  The overall size of these markets is therefore unclear. 

First, to find a measurement for understanding the scale of these businesses, the common metric would be the estimated size of global GDP:  World Bank data showed the final 2020 figure to be USD 85 trillion in current dollars.[1]  The final 2021 data have not yet been published. 

Next, we look to the Bank for International Settlements for its figures on outstanding derivatives contracts, which are tracked in their notional value,[1] not the net value if the contracts were to be liquidated.  Given the delays in central bank reporting and scrubbing of figures in Basel, the most recent data come from end-June 2021.

  • The notional value of outstanding derivatives stood at $610 trillion.
  • The gross market value of derivatives contracts – summing positive and negative values – stood at $12.6 trillion at end-June 2021, down a full 20% from end-2020. The decline in gross market value was broad-based, including for both interest rate and FX contracts.  The figure remained equal to a significant portion of world GDP.
  • Gross credit exposure dropped by 19% to $2.7 trillion over the same period.
  • These declines followed the sharp rises observed in 2020 amidst the pandemic-related market turbulence.
  • The distinction between on-exchange and OTC business is not broken out.

Finally, the statistics published by the Futures Industry Association give a different color to the picture.  The data for all of 2021 include only exchange-traded or exchange-cleared contracts, and exclude the pure OTC trades.[1]  The focus is not on the amounts of capital in play, but rather the growth in the number of contracts and the volume of trading, the liquidity and business aspects of these markets.                

  • The total volume of trading reached 62.6 billion contracts in 2021, up 33.7% from the previous year. Futures trading rose 14.6% to 29.3 billion contracts.  Options trading jumped 56.6% to 33.3 billion contracts.
  • Open interest, which measures the number of outstanding contracts at a point in time, was almost unchanged, up from 2.6% from 1.0 billion contracts at year-end 2020.
  • 2021 was the fourth year in a row that global exchange-traded derivatives markets set a record above the prior year in terms of total trading activity. Historic compounding of business growth over several decades means that the base of these numbers is huge.  As in past years, rapid growth in the equity index and single stock category accounted for most of the increase in trading.
  • FIA’s 2021 statistics are collected from 85 exchanges operated by 54 companies in 33 countries. The statistics are based on the number of contracts traded and/or cleared on these exchanges.

Boca 2022

Leaders from exchanges, clearinghouses, market-markers, clearing firms, regulatory agencies, and technology vendors have gathered in Florida for this conference every March for several decades; the attendance and information reach has been world-wide from the beginning.  In 2021, when Boca was held virtually, the world was “only” grappling with Covid recovery, raw materials shortages, and supply chain disruptions.  In 2022, by the time the conference opened in Florida, on top of the rest a war had broken out in Europe.

It is fundamental to note that throughout these massive upheavals in human affairs, markets have continued to function – with the particular exception of the Moscow Exchange, and even it reopened after a suspension of several weeks. Public price discovery is of fundamental importance to our economies.

What was discussed in Boca?

Four themes dominated the 2022 conference: the rapid growth of cryptocurrency markets and the potential for disruptive innovation; the invasion of Ukraine and the implications for global commodity markets; the short squeeze in the London Metal Exchange’s nickel futures market that took place the week before; and the growing importance of cloud computing and other forms of FinTech to the trading and clearing ecosystem.

In terms of business development, the rising prominence of the cryptocurrency sector was the topic that attracted the most attention. A large number of crypto companies with a high-profile presence attended, including exchange leaders from Coinbase and FTX, market-makers such as B2C2, Cumberland, Jump Crypto, and service providers such as BlockFI, Coopper.co, Kaiko, Solidus, and Talos.  For longstanding attendees, the presence of these companies was the most notable change from previous years, and it also underscored the interest these companies have in attracting the attention of leading players in what are now traditional derivates markets.

The influx of crypto companies has been raising new questions about market structure. In particular, one of these companies, FTX, has been seeking to introduce a new model for clearing into the US futures market that could disrupt traditional market structures and change the role of intermediaries.

FTX currently runs a large crypto derivatives market offshore that uses a direct clearing model.  Its customers are members of the FTX clearinghouse and post their own margin collateral to cover the market’s requirements on their outstanding positions, rather than using intermediaries. Moreover, trading and clearing operate on a 24/7 basis, margin requirements are recalculated every 30 seconds, and positions are automatically liquidated whenever there is a shortfall.

In August 2021, FTX bought Ledger X, a company that operates a futures exchange and a clearinghouse regulated in Washington by the Commodity Futures Trading Commission (CFTC). It is now seeking permission to import this direct clearing model into its US business.  In early April 2022, the CFTC issued a “request for comment” to the market to gather comments on how this new clearing risk model might be adopted in the US domestic derivatives markets.  Such a change would be fundamental.

Take-away for WAIFC

At least three concluding observations come to mind for the Alliance:

  • Often directly and certainly indirectly, the actors in all members’ marketplaces are deeply affected by the size and movements of derivatives markets, which continuously modify the pricing of assets and the risk models at play across the financial system.
  • For the past five decades since financial derivatives were launched in Chicago, the functioning of capital markets has often evolved because of, and in response to, the growing particular needs of the futures and options businesses. Clues for the future of finance are often found here.
  • On the face of it, clearing securities and futures trades is mechanical and dull. The reality is entirely different. Clearing is a pinch point in financial system; as is its purpose, it gathers and concentrates vast quantities of risk in one place, requiring equally vast amounts of assets to be set aside as margin to absorb potential losses. The model for how clearing risk has been managed historically now has a serious competitor.

As ever, the only constant for financial services is change.