EU derivatives market notional value falls by 5% in 2019

The notional value of the European Union derivatives market fell by 5% to €681 trn in 2019 compared with 2018, according to the European Securities Market Authority’s (ESMA) third Annual Statistical Report

The decline was attributed to muted activity in currency and equity derivatives, which slid 15% and 35% respectively. Interest rate derivatives (IRD) grew in the first half of the year, but then contracted, ending 2019 unchanged.

OTC trading still accounts for the bulk of the activity, increasing to 92%, up from 90% in 2018. The total share executed on trading venues (which includes some OTC trading) decreased from 17% to 15%, due to a drop in exchanged-traded derivatives (ETD).

The report shows that the proportion of ETD contracts across all assets slipped by 8% in the fourth quarter of 2019 from 10% in 2018 mainly  due to declines in IRDs and equities.

It also highlights strong growth in central clearing rates for both IRDs and credit derivatives. The former recorded a 6% jump from 63% to 69% while the latter reported a 7% hike to 32%.

The UK remained the locus of most derivative trading in Europe in 2019 with 82% of notional amount involving a UK-domiciled counterparty, unchanged from 2018. There were some signs of UK-US exposures growing slightly, while UK-EEA exposures fell.

Exposures continued to be highly concentrated in relatively few counterparties, particularly investment firms, credit institutions and central clearinghouses (CCPs). In all markets, a few large counterparties are widely connected to other market participants.

“This year’s EU derivatives report reflects the improving quality of data reported under EMIR to present a comprehensive picture of derivative markets,” said Steven Maijoor. “It shows in particular that the clearing obligation, which began in 2016, continued to reduce systemic and counterparty risk in 2019.”

He said, “The collection and analysis of this data helps ESMA meet its financial stability and orderly markets objectives, by contributing to our risk assessment capability, facilitating regulatory authorities’ oversight and enhancing supervisory convergence across the EU.”