The Evolution of OTC Interest Rate Derivatives Markets

14 Pages Posted: 17 Dec 2019

See all articles by Torsten Ehlers

Torsten Ehlers

Bank for International Settlements (BIS)

Bryan Hardy

Bank for International Settlements (BIS) - Monetary and Economic Department

Date Written: December 8, 2019

Abstract

The trading of interest rate derivatives in over-the-counter (OTC) markets more than doubled between 2016 and 2019, significantly outpacing the growth of trading on exchanges. This rapid expansion was driven by three factors. First, non-market facing trades, such as back-to-back deals and compression trades, increased and were more comprehensively reported in the BIS Triennial Survey. Second, technological developments reduced transaction costs in OTC markets and spurred trading, including more trading by investment funds. And third, changing expectations about US short-term interest rates fuelled hedging and speculative activity. In general, structural developments like clearing, compression and automation remade OTC markets so that they more closely resembled exchanges and led to a relative shift in trading from exchanges to OTC markets. Further market changes due to benchmark rate reforms may be on the horizon.

JEL Classification: E43, G15, G18, G21, G23

Suggested Citation

Ehlers, Torsten and Hardy, Bryan, The Evolution of OTC Interest Rate Derivatives Markets (December 8, 2019). BIS Quarterly Review, December 2019, Available at SSRN: https://ssrn.com/abstract=3502886

Torsten Ehlers (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Bryan Hardy

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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