The Bank for International Settlements (BIS), a central bank of central banks, publishes a quarterly review which is usually worth skimming through. There is quite a bit of content relating to non-US markets, and some useful information on global derivatives. The latest quarterly review was posted on December 7 and is available here:
This blog will focus on just two small parts of the quarterly review: derivatives markets (page 22) and debt markets (page 26). All graphs are from the BIS publication; see the link above for list of authors.
The global OTC (over-the-counter) derivative market is the largest derivative market. Notional amounts of all OTC derivatives were $605 trillion at the end of June, up 10% from 6 months before. Gross market value, the absolute values of all long/short positions, decreased by 21% to $25 trillion.
The increase in notional amounts is consistent with the leveraging up / reflation of the financial system in 2009, after the deflation seen earlier. The global OTC derivative market is now as big as it was at 2007 year end in notional terms, and considerably larger than 2007 in terms of market values of derivative positions. The decline in gross market values over the last 6 months may be a reflection of declining volatility, particularly in interest rate derivatives, which are the foundation of the whole industry.
These off balance sheet OTC derivative exposures indicate “hidden leverage” in the banking system. The leverage in the system today is just as high as ever. As bad as the 2008 crisis may have seemed, there has been no significant de-leveraging. This either shows that the banking system is amazingly resilient, or that we “haven't seen anything yet”.
Net issuance of debt (borrowing) in the third quarter was down from the second quarter, but the BIS says that in seasonally adjusted terms, global issuance was stable. Developed economies had significantly lower net issuance (-45% versus the previous quarter) while emerging markets borrowed significantly more (52% more than the previous quarter).
Debt issuance was particularly strong in Latin America, developing Asia and the Pacific. Borrowing in developing Europe was notably weak, despite the overall strength in emerging markets.
While emerging markets were the major borrowers this quarter, developed countries did issue significant debt in the previous quarters. As the rebound in credit markets started, developed countries were the first to issue debt. Emerging markets are now catching up, lagged by 2 quarters.
- Perpetual Bull