derivatives cityuk 2012

7/30/2019 Derivatives CityUK 2012

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financial markets series

DERIVATIVESnovemBer 2012

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DERIVATIVESNOVEMBER 2012

This report reviews developments in the derivativesmarkets globally. The industry has undergone reformin recent years but, with a major agenda of post-crisisregulation yet to be implemented, there are concernsabout achieving a balance between regulation thatdelivers safe markets and the costs of participation in

those markets. Such a balance would ensure thatmarkets continue to function on a basis that iseconomically viable, particularly in relation to themanagement of business risks.

Trends in derivatives markets worldwide have beenuneven since 2008: exchange trading recovered in 2010and 2011 but is likely to be down in 2012. UK banksnet spread earnings from derivatives make a largecontribution to the UK financial services trade surplus.

OVERVIEW OF TRADING

Global market Derivatives provide users of both financial and non-financial services with mechanisms to manage a broad spectrum of

business risks. In common with other parts of the financial services the

derivatives industry has undergone reform following the financial crisis of

2008. A continuing concern of providers and users of derivatives since

2008 has been that with a major post-crisis agenda of regulatory change

yet to be implemented,a balance is achieved as outlined in the

introduction above. A focus on global regulatory reform features on

page 3.

OTC derivatives markets The notional outstanding value of OTC

derivatives contracts fell by 8% to $648 trillion in the six months to end-December 2010. Notional value remains at broadly the same level as the

$673 trillion high before the financial crisis in June 2008 (Chart 1, Table

1). Relative stability in notional value since end-2008 contrasts with

the sustained growth that had characterised OTC derivatives market

over the previous 15 years. Recent trends are linked with the moves

to netting and central counterparty clearing of some contracts,

particularly CDS, that followed concerns about systemic risks posed

by some OTC derivatives. Gross market value, which peaked at

$35.3 trillion at end-2008, fell to $19.5 trillion in June 2011 before

picking up to $27.3 trillion in December 2011.

The UK has a dominant position as the global centre for OTCderivatives trading, with a 46% share of OTC interest rate derivatives

in April 2010 (Chart 2): the next triennial survey being scheduled for

www.thecityuk.com 1

sponsored by:

*March 2012Source: Bank for International Settlements

$ trillion, notional amounts outstanding, June & December

0

100

200

300

400

500

600

700

2012*2010200820062004200220001998

Exchange-traded

Over-the-counter

Chart 1

International derivatives market

Source: Bank for International Settlements (next survey April 2013)

Average daily turnover in April, % share

2007

2004

0

5

10

15

20

25

30

35

40

45

SingaporeSwitzerland

JapanFrance

USUK

2001

2010

Chart 2

Location of interest rate OTC derivatives

*Except where statedSource: Bank for International Settlements, Futures Industry Association

OTC marketNotional valueGross market valueGross credit exposure

Exchange-traded derivativesNotional valueTurnover (period)Number of contracts traded(bn, period)

$ trillion, end-period*

2007508

163.3

792.315.5

2006418102.0

691.812.0

2008673

355.0

582.217.7

2009595

223.5

731.717.7

2010601

213.5

682.022.4

Table 1

Measures of activity in international derivatives markets

2011648

273.9

572.225.0


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April 2013. The US accounts for a further 24% of turnover with the next

largest locations being France and Japan. Turnover has become

increasingly concentrated as market share of the 10 largest firms in the

UK increased from 71% in 2001 to 92% in 2010.

Interest rate instruments remain the mainstay of OTC derivatives,accounting for 78% of global notional value. The share of derivatives

based on foreign exchange contracts makes up a further 10% and credit

default swaps 4.4%, with the latter having fallen from 7.0 % in 2008. In

terms of notional value the euro is the largest currency with 36.6% of

trading of single currency interest rate derivatives at end-2011; closely

followed by the US dollar with 32.1%. The other major currencies traded

are the Japanese yen 13.3% and the pound sterling 8.6%.

Freight derivatives have become firmly established over the past decade:

trading by the larger UK-based shipbroking houses totalled 1.3m lots in

2010 with a drop to 1.2m in 2011. There are a range of participants in

energy derivatives with strong growth in the value of trading in energyOTC derivatives, up by 56% to $921bn in the year to June 2011.

Exchange-traded derivatives Value of turnover increased by 20%in 2010 and by 9% in 2011 to reach $2,160 trillion, recovering from a

low point of $1,662 trillion in 2009. A drop in quarterly turnover to

around $425 trillion in the three quarters between Q4 2011 and Q2 2012

would, if sustained, result in a 20% drop in exchange-traded turnover

during 2012 (Chart 3). Based on notional value of trading, the biggest

exchange groups worldwide are CME Group, NYSE Liffe and Eurex.

London has a prominent role in global exchange-traded derivatives. The

1,603 million contracts traded on UK-based derivatives exchanges in 2011was virtually the same as the 1,604m in 2010. Trading on UK exchanges

is down to 749m in the first half of 2012. While trading at NYSE Liffe is

likely to be down over the year, both ICE Futures Europe and the London

Metal Exchange could see a new high in the number of contracts traded

in 2012 if trading in the first nine months of the year is sustained during

the final quarter.

NYSE Liffe is the leading exchange in the trading of short-term euro

interest rate contracts (STIRs), which account for 97% of NYSE Liffe

turnover by value. More than 90% of international business in non-

ferrous metal futures is transacted at the London Metals Exchange. ICE

Futures Europe is the leading electronic global exchange for energyproducts. European Climate Exchange, part of ICE Futures Europe, is the

leading carbon markets exchange in Europe for futures and options

trading. Turquoise enables trading in Russian, Norwegian and UK equity

derivatives. CME Group, which has operated in London for more than 30

years, is seeking to strengthen its position following its application to the

FSA to establish a London-based derivatives exchange.

UK banks net spread earnings from derivatives transactions with overseas

clients totalled 10bn in 2011, over a fifth of UK financial services trade

surplus of 46.7bn in that year.

2 www.thecityuk.com

DERIVATIVES NOVEMBER 2012

Source: Bank for International Settlements

$ trillion, quarterly value of turnover

0

100

200

300

400

500

600

700

2012201020082006200420022000

Chart 3

International exchange traded turnover by value

Measures of derivatives used inBIS survey

Nominal or notional amounts outstanding

provide a measure of market size, and can also

provide a rough proxy for the potential transfer

of price risk in derivatives markets. They are also

comparable to measures of market size in related

underlying cash markets.

Gross market value supplies information about

the scale of gross transfer of price risks in the

derivatives markets. Essentially it represents of the

cost of replacing all existing contracts. It provides

a measure of market size and economicsignificance that is readily comparable across

derivatives markets and products.

Gross credit exposure represents the current

value of contracts that have a positive market

value after taking account of legally enforceable

bilateral netting agreements, i.e. it measures

netted credit exposures between counterparties.

Turnover data collected in the triennial survey

provide a measure of market activity, and can also

provide a rough proxy for market liquidity.

Turnover is defined as the absolute gross value of

all new deals entered into during the month of

the surveys, and is measured in terms of nominal

or notional amount of the contracts.


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NOVEMBER 2012DERIVATIVES

GLOBAL REFORM OF DERIVATIVES REGULATION

The financial crisis has generated a shift towards a more intensive set of

regulatory and prudential standards that are intended to reduce the

potential for failure of firms, to raise capital requirements, to enhance

governance, and to make the market place more resistant to shocks. Thederivatives industry has recognised the requirement for such global

standards in regulation and therefore supports reforms that ensure

market stability and reduce systemic risk. However, the industry has

echoed concerns of the de Larosire Group that a drive towards too much

regulation slows down financial innovation and therefore undermines

economic growth in the wider economy.

In this context, the industry is concerned that the implementation of

various EU regulatory initiatives represents an agenda for providers and

users of derivatives that will be complex ,costly and burdensome and will

impact on market liquidity, functionality and choice. Global firms will also

have to factor in the reach and impact of the US Dodd-Frank Act to

activities outside the US and, potentially, the legislative reach of any other

jurisdiction in which they are carrying on business.

The priority for providers and users of derivatives is whether or not the

new regulatory structures will achieve an authentic balance between on

the one hand, regulatory solutions that deliver safe and sound markets

and, on the other, the ability of users to ensure there is sufficient diversity

and choice in the provision of products and services to manage their risks

collectively and at a fair cost: the latter is key to encouraging economic

growth and commercial recovery.

The authorities are looking to replicate the strengths of listed derivativesmarkets in OTC derivatives markets. Such strengths include price

transparency, multilateral execution, and central counter party clearing.

However, it is important that reforms do not impinge on the crucial role

of OTC markets in helping firms to manage complex underlying risks and

facilitating the development of new contracts and markets; in providing

an environment in which smaller and more specialist markets, unsuited to

multilateral execution, can survive and grow; and in delivering customised

risk-management solutions for specific risks on a cost-efficient and well

regulated basis.

OVER THE COUNTER DERIVATIVES MARKETS

Data on global OTC derivatives markets is generated mainly from statistics

compiled by the Bank for International Settlements (BIS) through the

six-monthly survey of major market participants and the triennial central

bank surveys.

I. Six monthly BIS survey of major market participants

Size Indicators of activity in OTC markets have shown varying trends inrecent years: Notional value As indicated in the overview, the notional outstanding

value of OTC derivatives contracts fell 8% to $648 trillion in December

2011 from $707 trillion in June 2011, having previously jumped in the

first half of the year from $601 trillion in December 2010 (Chart 1). At

its end-2011 position, notional value remains close to the $672 trillion

www.thecityuk.com 3

0

5

10

15

20

25

30

35

2011200920072005200320011999


$ trillion, June & December

Gross credit exposureGross market value

Gross creditexposure

Gross marketvalue

0

1

2

3

4

5

Chart 4

OTC derivatives markets


$ trillionInterest ratesForeign exchangeCredit default swapsEquity-linkedCommodityUnallocatedTotal contracts

% shareInterest ratesForeign exchangeCredit default swapsEquity-linkedCommodityUnallocated

Total contracts

Notional amounts outstanding, end-year

2005212

311465

31299

70.8

10.5

4.6

1.9

1.8

10.3

100.0

20104655830

63

40601

77.4

9.6

5.0

0.9

0.5

6.6

100.0

20115046329

63

43648

77.8

9.8

4.4

0.9

0.5

6.6

100.0

20084335042

64

63598

72.3

8.4

7.0

1.1

0.7

10.5

100.0

2009450

4933

63

63604

74.5

8.1

5.4

1.0

0.5

10.5

100.0

Table 2

Risk instruments in global OTC derivatives markets


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in 2008. Notional value of exchange-traded derivatives at

$57 trillion, is less than one tenth of OTC derivatives.

Gross market value Gross market value of OTC derivatives

had fallen back by 45% to $19.5 trillion in mid-2011 from

the end-2008 peak of $35 trillion , before increasing by40% during the second half to $27.3 trillion at end-2011

(Chart 4).

Gross credit exposure Trends in gross credit exposure have

closely tracked those of gross market value. Credit exposure

fell 41% from the peak of $5.0 trillion at end-2008 to

$3.0 trillion in June 2011 before rising 31% to $3.9 trillion

at end-2011 (Chart 4).

Risk instruments Interest rates account for the majority ofactivity in the OTC derivatives market based on notional value.

Interest rates share of notional value has risen from 72% atend-2008 to 78% at end-2011 (Table 2). The share of derivatives based

on foreign exchange contracts has edged up from around 8% to 10%

over the same period. The share of credit default swaps (CDS) has

dropped by over a third from 7.0% to 4.4% between 2008 and 2011

(see paragraph on CDS on page 5). The share of equity-linked derivatives

has been relatively stable at around 1% in recent years, while

commodities share has edged down to 0.5%.

Currency composition The euro and the US dollar are the mostwidely traded currencies in single currency interest rate derivatives, with

36.6% and 32.1% shares respectively in December 2011 (Table 3). Share

of both currencies has fallen slightly in recent years, with pound sterlingthe main beneficiary up from 6.8% to 8.6% in three years to December

2011. The other main currency is the Japanese yen with 13.3%: Swedish

krona and Swiss franc each made up just over 1% and other currencies a

combined 5.9%, up from 4.4% three years earlier.

II. BIS coordinated triennial central bank survey (April2010, next survey April 2013)

Six worldwide triennial surveys have been undertaken since 2005, the

most recent in April 2010, with the next survey scheduled for April 2013.

Average daily global turnover of interest rate OTC derivatives increased by

24% between April 2007 and April 2010, with much of this growth likelyto have occurred in the first half of this period, as notional value indicates

that activity reached a peak in the second half of 2008. Coverage of the

triennial survey in April 2010 was narrowed to interest rate OTC

derivatives alone, but as these account for over three quarters of all OTC

derivatives based on notional value they provide a good overall indicator

of the trends in total OTC derivatives turnover.

Location International trading in interest rate OTC derivatives is heavilyconcentrated in the UK and US, according to the BIS coordinated survey

(Table 4). The share of global turnover based in the UK increased further

to 45.8% in April 2010 from 44.0% in 2007. The UKs share was morethan 10% higher than the 35.2% in 2001. The US share has been relative

static at around 24% in the three surveys since 2004 although higher

than 17% in 2001. Other main centres in 2010 were France 7%, and

4 www.thecityuk.com


0

10

20

30

40

50

60

70

80

90

100

20102007200420012010200720042001

% share of average daily turnover in April

Other fin. instnsReporting dealers Non-fin. customers

29%

66%

5%

81%

17%

2%

50%

6%

44%44%

48%

8%

44%

47%

9%

59%

4%

37%

-----------------UK------------------------------------World---------------

Source: Bank for International Settlements, Bank of England

44%

11%

45%

54%

10%

36%

Chart 5

Counterparties in interest rate OTC derivatives markets


UKUSFranceJapanSwitzerlandSingaporeNetherlandsGermanyCanadaAustraliaSpainItalyHong KongOthersTotal

2001

2381166516103

2494101021243

44676

Average daily turnover in April

2001

35.217.1

9.6

2.3

1.4

0.5

3.6

13.9

1.5

1.4

3.0

3.5

0.4

6.5

100.0

2010

45.823.8

7.2

3.3

2.9

2.9

2.3

1.8

1.5

1.5

1.1

1.0

0.7

4.2

100.0

2007

44.024.2

8.1

3.5

2.8

2.6

1.2

4.2

0.9

1.0

0.8

1.4

0.8

4.4

100.0

2010

123564219390797861494241312719

1122698

2007

9575251767661572790212317301796

2173

2004

56331715131129

19431213123811

1001331

2004

42.323.8

11.4

2.3

0.9

0.6

1.4

3.2

0.9

1.0

0.9

2.8

0.8

7.5

100.0

-----------------$bn----------------- ----------------% share--------------

Table 4

Location of interest rate OTC derivatives turnover


Notional amounts outstanding$ trillion, by currency, December

EuroUS dollarJapanese yenPound sterlingCanadian dollarSwedish kronaSwiss francOtherAll currencies

% share

EuroUS dollar

Japanese yenPound sterlingCanadian dollarSwedish kronaSwiss francOther

All currencies

20081611496229355

19433

37.334.414.26.80.61.21.24.4

100.0

2005817426152338

212

38.435.112.17.10.81.21.53.7

100.0

20091761535434355

20450

39.134.112.07.60.81.01.14.4

100.0

20101781526038455

24465

38.232.612.88.10.91.11.15.2

100.0

Table 3

Single currency interest rate derivatives

20111851626743665

30504

36.632.113.38.61.31.21.15.9

100.0


7/16


Japan, Switzerland and Singapore each around 3%. Germanys share

more than halved from 4.2% to 1.8%.

Counterparties The major feature of the global counterpartybreakdown was a further rise in the share of non-financial institutions to

11% in 2010 up from 9% in 2007 and 5% in 2001 (Chart 5). Reporting

dealers globally saw a drop in share from 47% to 44% between 2007

and 2010, while other financial institutions were more stable at around

45%. While the increasing prominence of non-financial institutions has

also been evident in the UK, the growth in reporting dealers share of UK

activity from 50% to 54% of UK notional value was in the opposite

direction to the global market. Given that the UK accounts for such a

large share of turnover, this indicates that the UK probably accounts for

over half of global trading between reporting dealers, reflecting the

global nature of wholesale financial markets in London.

Concentration The OTC interest rate derivatives market in the UK hasbecome steadily more concentrated amongst the largest firms over the

past 15 years. Out of a total of 42 firms in the UK survey, the share of the

largest 10 jumped to 92% in the April 2010 survey from 81% in April

2007. Prior to that it had grown from 52% since the first survey in 1995

(Chart 6). The largest 20 institutions in the UK survey accounted for 99%

of turnover in the most recent survey. In the US, the other major location,

the largest 10 institutions accounted for 95% of turnover in April 2010.

The total number of US participating institutions fell to 19 in 2010 from

28 in 2007 as a result of consolidation and exit of some dealers from the

market.

III. Other developments in OTC derivatives markets

Credit default swaps (CDS) In CDS one party promises to payanother party a fixed fee in exchange for a guarantee that if a bond

defaults it will be redeemed. A combination of netting, centralised

clearing and reduced spreads contributed to a 48% fall in notional

amounts outstanding of CDS worldwide from $58 trillion at end-2007 to

$30.3 trillion at end-June 2010. The downward trend in CDS notional

value has since tapered, easing to $28.6 trillion in the 18 months to end

2011 (Chart 7). The decline in global market value of CDS has been even

steeper, down nearly three quarters from $5.12 trillion at end-2008 to

$1.34 trillion in mid-2011, although the second half saw a pick up to$1.59 trillion in December.

Freight derivatives A number of the large UK-based shipbrokinghouses have been using freight derivatives to hedge or take a position on

the future movement of freight rates. According to Baltic Exchange

estimates, the number of lots traded as Forward Freight Agreements

(FFAs) in the OTC derivatives market fell from the peak of 2.1 million lots

in 2008 to around 1.4m in 2009 and 2010 and to 1.3m lots in 2011

(Chart 8). In 2012 trading was 0.75m lots in the eight months to August,

so is likely to ease to 1.2m lots for the full year.

The dry bulk market, such as grain and coal, has accounted for just overthree quarters of contracts traded since 2009, with tanker trades,mainly

oil, making up the remainder. The predominance of dry bulk in trading is

www.thecityuk.com 5

Source: Bank for International Settlements (BIS)

$ trillion, mid-year & end-yearnotional amounts outstanding

Notionalvalue

0

10

20

30

40

50

60

20112010200920082007200620050

1

2

3

4

5

6

$ trillion, mid-year & end-yearmarket value

Marketvalue

Chart 7

Credit default swaps

Source: Bank of England

% share of average daily turnover in April

Next largest10 firms

Largest10 firms

Otherfirms

0

20

40

60

80

100

201020072004200119981995

74%

6%

15%

11%18%

15%

15%

67%

30%

18%

79%

52%

5%

14%

81%

1%

7%

92%

Chart 6

Concentration of interest rate OTC derivatives in UK

*Year to AugustSource: Baltic Exchange

Forward Freight Agreements (FFAs), millions of lots

Chart 8

Freight derivatives traded

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2012*201120102009200820072006

Tanker

Dry


8/16

due to the much higher share of freight costs in the dry

market.

Energy derivatives There are a range of participantsactively trading energy-related financial instruments

including oil and gas producers, utilities, refiners and other

industrial consumers, investment banks and hedge funds.

The FSAs annual survey of energy market brokers in the

year to end-July 2011 showed that, with the exception of

emissions trading and volume of UK power, both the

volume and value of trading increased in the six asset

classes surveyed (Table 5).

The volume of Euro power and gas and UK gas all

increased by just over a quarter in the latest survey year

while coal volumes were up by 2%, emissions were down

13% and UK power down 29%. An across the board surge in prices,ranging from around 15% for Euro gas and emissions to 60% for UK

power, contributed to the value of the energy derivatives market growing

by 56% to $921bn in 2011, up from $592bn in 2010.

EXCHANGE-TRADED DERIVATIVES

International exchange tradingComparisons based on the nominal value of turnover provide the most

accurate indicator of the relative size of exchanges, although international

trading is more easily compared on the basis of the number of contracts

traded. However, comparisons based on numbers of contracts can be

heavily influenced by contract sizes selected by each exchange. Smallcontract sizes raise the number of contracts traded, a particular feature of

the Korean, Indian, Mexican and Brazilian exchanges, where individuals

account for a larger share of trading.

Value of turnover Value of turnover increased by 20% in 2010 andby 9% in 2011 to reach $2,160 trillion, up from a low point of

$1,662 trillion in 2009. Recovery in turnover has therefore taken it closer

to the earlier high point of $2,287 trillion in 2007 (Chart 9). Quarterly

turnover has dropped from around $580 trillion in each of the first three

quarters of 2011 to between $418 trillion and $428 trillion in the three

quarters between Q4 2011 and Q2 2012 (Chart 3). If trading is sustainedat this level, annual exchange traded turnover could be 20% lower in

2012.

Turnover of exchange-traded derivatives is heavily concentrated on the

exchanges of North America and Europe, which have accounted for

around 90% of trading by value in recent years. According to BIS data,

50% of turnover by value in 2011 was based in the North American

exchanges, 38% in Europe, 10% in Asia/Pacific and 2% in other regions

of the world (Chart 9).

The largest exchange is CME Group, which includes the Chicago

Mercantile Exchange, the Chicago Board of Trade and New York

Mercantile Exchange. NYSE Liffe is the second largest on value of trading,

and is followed by Eurex (Chart 10).

6 www.thecityuk.com



$ trillion, annual value of turnover

Europe

North America

Other regions

Chart 9

Exchange-traded derivatives turnover by region

0

400

800

1200

1600

2000

2400

20112010

20092008

20072006

20052004

20032002

20012000

Source: CME Group, NYSE Liffe & Eurex

Value of derivatives turnover, $ trillion

CMEGroup

NYSE Liffe

Eurex

Chart 10

Largest derivatives exchanges

0

200

400

600

800

1000

1200

20112010

20092008

20072006

20052004

20032002

20012000

*TWH: terawatt hoursSource: FSA survey of energy derivatives markets

Size of market, TWH*

UK powerUK gasEuro powerEuro gasCoal (m tonnes)Emissions (m tonnes)

Notional value of market, $bn

UK powerUK gasEuro powerEuro gasCoalEmissionsTotal

2005

68850892525689415121

2554777

452

178

% change2011

-292827272

-13

2105478332-456

Contracts transacted by energy market brokers in the UK,Twelve months ending July

2011

919164996200626022102554

4929927610516824

921

2010

1290128414885492421712940

4814618857

12725

592

2008

110499193758150915951956

6317617827

11136

590

2009

113096444090324319442963

6515721156

12939

657

Table 5

Energy derivatives


9/16


Number of contracts traded The number of contracts transactedthrough derivatives exchanges worldwide increased by 11% to a record

25.0bn contracts in 2011 from 22.4bn in 2010 (Table 6) . The first half of

2012 has seen a drop in trading to 11.0bn contracts, so the volume of

contracts traded could decline by more than 10% over the full year

compared with 2011.

Based on location of exchanges the US accounted for 33% of contracts

traded in 2011, followed by South Korea 16%, India 15% and Germany

8%. Exchanges in the UK made up 6% (Table 6). Trading has grown

rapidly in emerging markets, with the share of global contracts traded in

exchanges in the BRIC economies rising from 10% in 2005 to 30% in

2011.

Korea Futures Exchange, with 3.9bn contracts was the largest exchange

based on the number of contracts (Table 7). It is followed by CME Group

2.8bn, National Exchange of India 2.2bn, and Eurex 2.0bn. RegardingUK-based exchanges NYSE Liffe is sixth largest on number of contracts

while ICE Futures Europe is 21st and London Metal Exchange 27th.

Exchange traded derivatives in the UKThere are four derivatives exchanges based in the UK: NYSE Liffe, London

Metal Exchange, ICE Futures Europe and Turquoise.

NYSE Liffe Turnover at NYSE Liffe exchanges in Europe has exceededone billion contracts annually since 2008 (Table 8). In 2011 trading fell by

6% to 1,148m from 1,223m in 2010. In the first nine months of 2012

trading totalled 730m contracts, pointing to a drop of around 15% forthe full year (Table 8). Trading in short term euro interest rate contracts

(STIRs), for which NYSE Liffe is the leading exchange, has accounted for

around 97% of the exchanges annual turnover by value in recent years.

Based on volume, STIRs account for 47% of contracts and other interest

rates 3%; individual equities contribute 35% of trading,

equity index options 13% and commodities the remaining

2% (Chart 14 on page 11).

London Metal Exchange Annual turnover of LMEcontracts rose to 147m in 2011 from 120m in 2010 and

112m in 2009. Aside from a small drop in 2009, the

number of contracts traded has been rising steadily formuch of the past decade. Some 119m contracts were

traded in the first nine months of 2012: if sustained at this

level in the fourth quarter trading at LME would reach a

new high for the year of over 158m contracts, up some 8%

on 2011. Primary aluminium is the most widely traded

metal typically between 42% and 47% in recent years.

Copper consistently accounts for about a quarter of trading

and zinc around 15%. Lead and nickel accounted for 8%

and 6% of trading in 2011. Their share has edged up in

recent years. (Breakdown of 2011 volumes in Chart 15 on

page 11)

www.thecityuk.com 7

1First six months of 2012

Source: Futures Industry Association

US

Korea

India

Germany

UK

Brazil

Russia

China

Japan

Australia

Taiwan

South Africa

Hong Kong

Sweden

Other countries

Total

Annual number of contracts traded, millions-------% share--------

2005

3525

2593

204

1249

537

466

61

261

203

88

93

51

26

104

346

9804

20121

3722

1394

1488

931

749

866

506

494

170

129

78

86

62

57

300

11031

2005

36.0

26.4

2.1

12.7

5.5

4.8

0.6

2.7

2.1

0.9

0.9

0.5

0.3

1.1

3.5

100.0

2010

7121

3749

2863

1897

1604

1414

656

1567

376

106

140

170

116

109

537

22425

2011

8119

3928

3791

2043

1603

1500

1099

1054

398

225

183

166

140

117

605

24972

2011

32.5

15.7

15.2

8.2

6.4

6.0

4.4

4.2

1.6

0.9

0.7

0.7

0.6

0.5

2.4

100.0

Table 6

Exchange-traded derivatives turnover by country

20121

33.7

12.6

13.5

8.4

6.8

7.8

4.6

4.5

1.5

1.2

0.7

0.8

0.6

0.5

2.7

100.0

1First 6 months of 2012


1

2

3

45

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

27

Annual number of contracts traded, millions

2005

2593

1765

132

1249468

416

53

163

--

269

449

198

202

175

145

28

--

20

34

198

42

79

2010

3749

2580

1616

18971115

1223

624

847

885

803

745

610

440

500

488

496

125

197

622

403

217

120

Exchange

Korea Futures Exchange

CME Group

National Stock Exchange of India Ltd

EurexChicago Board Options Exchange

NYSE.Liffe

Russian Trading Systems Stock Exch.

Nasdaq OMX PHLX

MCX-SX

BOVESPA

International Securities Exchange

Bolsa de Mercadorias & Futuros

NYSE AMEX Options

New York Mercantile Exchange

NYSE Arca Options

Zhengzhou Commodity Exchange

United Stock Exchange of India

Multi Commodity Exchange of India

Shanghai Futures Exchange

Dalian Commodity Exchange

ICE Futures Europe

London Metal Exchange

2008

2865

2854

590

21651193

1050

238

547

--

350

1008

392

207

423

417

223

--

94

140

313

153

113

2009

3103

2157

919

16871135

1056

474

606

224

547

960

373

248

433

421

227

--

161

435

417

166

112

20121

1394

1275

972

931568

510

506

407

290

495

332

371

294

280

211

125

4

199

132

196

140

80

Table 7

Largest derivatives exchanges

2011

3928

2842

2200

20431152

1148

1083

983

850

841

778

659

619

545

495

406

352

346

308

289

269

147


10/16

ICE Futures Europe Turnover at ICE Futures Europe has alsocontinued on its rising trend, up by 24% in 2011 to 269m contracts,

following a 31% increase in the previous year. With 213m contracts

traded in the first three quarters of 2012, a further rise of around 5% to

over 280m contracts is projected for 2012 if trading is sustained at this

level in the final three months of the year..

Brent Crude futures remains the biggest contract with 50% of turnover in

2011 and 56% in the first half of 2012. The share of West Texas

Intermediate, launched in 2006, has declined from a high of 37% of

trading in 2007 to 19% in 2011 and 13% in the first half of 2012. Gas oil

made up a quarter of trades in 2011.

Emissions trading on European Climate Exchange (ECX), which is part of

ICE Futures Europe, accounts for 3% of exchange turnover, but ECX is the

dominant exchange for futures and options trading in the EU Emissions

Trading Scheme, accounting for 98% of turnover in 2011 (Chart 11).Breakdown of contracts traded on ICE Futures Europe is in Chart 16 on

page 11.

Turquoise, established in 2008 and majority owned by the LondonStock Exchange, enables trading in Russian, Norwegian and UK

derivatives markets. Trading totalled 25.3m contracts in the first nine

months of 2012, so trading for the year is likely to fall short of the 38.5m

contracts traded during 2011.

Other trading in the UK The UK is an important source of remote

trading for the increasing volume of derivatives business globally that istransacted electronically. A geographic breakdown for the origination of

Eurex derivatives contracts data, available until 2009, showed that the

share of Eurex contracts sourced from the UK was at least 45% each year

from 2003. NYSE Liffe estimates that 60% of its business originates in

London. CME Group, which has been operating in London for over 30

years, is seeking to strengthen its presence following its application to

establish a London-based derivatives exchange.

CONTRIBUTION OF DERIVATIVES TO UK ECONOMY

Derivatives provide a set of risk management tools for a wide range of

organisations, so the wider economic contribution of derivatives is seen in

the benefits they bring to individuals and businesses - access to finance atlower costs and controlling foreign exchange risk for importers and

exporters.

The estimation of derivatives' contribution to the economy in terms of

share of GDP, employment and overseas earnings is not straightforward.

In other financial markets the value of activity is related to revenue and

profits of the firms involved. With derivatives the measures of market

activity cannot be so easily ascertained, partly because the value of a

derivative is related to the shifting value of the underlying asset. Available

data for the UK is set out below.

Employment related to the derivatives markets is widely spread acrosstrading floors in investment banks, derivatives exchanges, other dealers of

futures, options and commodities, and various support and back office

8 www.thecityuk.com


Volume of emissions transacted through futures & options,

billion tonnes CO2


Chart 11

EU ETS futures and options exchange trading

0

1

2

3

4

5

6

7

201120102009200820072006

Otherexchanges

EuropeanClimateExchange(ECX)

1First nine months of 2012Source: Exchanges

200520062007200820092010201120121

ICE FuturesEurope

42.192.9

138.5153.0165.7217.1269.0212.6

Total880.0910.2

1179.61315.91333.61604.11602.6749.0

LME78.686.992.1

113.2111.9120.3146.6119.1

NYSELiffe

759.3730.3949.0

1049.71056.01222.61148.5

729.6

Millions of contracts traded each year

Table 8

Turnover of derivatives exchanges in London

Turquoise------------

34.944.238.525.3


11/16


functions. It is estimated that there are about 10,000 people employed in

derivatives in central London.

Overseas export earnings include banks spread earnings and netfee income on derivatives contracts; fee income of futures and options

dealers; and fees and commissions on exchange contracts of UK-based

derivatives exchanges.

Banks spread earnings and fee income Banks generate substantial

exports from spread earnings on derivatives, foreign exchange trading

and other securities transactions. Net spread earnings on derivatives

totalled 10.0bn in 2011, recovering from 7.6bn in 2010. Previously, net

spread earnings had grown rapidly from 4.1bn in 2004 to 13.1bn in

2008 before falling back in the following two years (Chart 12).

The 10bn trade surplus generated by banks in net spread earnings on

transactions with overseas clients accounted for over a fifth of the total46.7bn UK trade surplus in financial services in 2011.

Separate data on banks net fee income is based on gross derivatives fees

receivable from foreign residents for derivatives services, netted off

against fees payable. Because fee income from commission is usually

included in the spread, data reported by banks to the Bank of England on

their net overseas service earnings from derivatives commission is a

fraction of spread earnings: such fee income fell to just 24m in 2011

from 183m in 2010.

Fee income of futures and options dealers Net exports of futures and

options dealers have not been separately identified in balance of

payments statistics since 2002 when they totalled around 250m.

Fees and commissions on exchange contracts and clearing These are

significant as a majority of customers of UK exchanges and clearing

organisations are based overseas or owned by overseas companies.

International investment position The value of financialderivatives in the international asset position of UK financial institutions -

covering banks and securities dealers - recovered to 3,618bn at end-

2011 from 2,963bn at end-2010 (Chart 13).

Previous figures based only on banks, nearly halved from a high of

4,040bn at end-2008 to 2,176bn at end-2009. Banks account for just

over three quarters of financial derivatives assets - 76% in 2010 and 2011

- with the balance being made up by securities dealers.

www.thecityuk.com 9

*Securities dealers data available from 2010Source: Office for National Statistics, Bank of England

Financial derivatives, assets valued at end-year, bn

Banks

Securities dealers*

Chart 13

Financial derivatives: international assets of

UK financial institutions

0

500

1000

1500

2000

2500

3000

3500

4000

20112010200920082007200620052004

Source: Bank of England

bn, spread earnings on derivatives transactions

Chart 12

UK banks net exports from spread earnings

0

2

4

6

8

10

12

14

20112010200920082007200620052004


12/16

Alternative Investment Management Association.www.aima.org

Bank for International Settlements

Triennial surveys of OTC derivatives marketsInternational Banking and Financial Market Developments (quarterly).www.bis.org

Bank of Englandwww.bankofengland.co.uk

Financial Services AuthorityAnalysis of activity in the energy markets (annual)www.fsa.gov.uk

Eurexwww.eurexchange.com

Futures and Options Associationwww.foa.co.uk

Futures Industry Associationwww.futuresindustry.org

ICE Futures Europewww.theice.com

International Swaps and Derivatives Associationwww.isda.org

LCH.Clearnetwww.lchclearnet.com

London Metal Exchangewww.lme.com

NYSE Liffewww.euronext.com/derivatives

Turquoisewww.tradeturquoise.com

10 www.thecityuk.com


OTHER SOURCES OF INFORMATION


13/16


www.thecityuk.com 11

Source: London Metal Exchange

% share of lots traded by type of metal, 2011

Aluminium

Copper

Zinc

Chart 15

London Metal Exchange

Lead

Nickel

Tin 1% Other metals& plastics 1%

43%

6%

8%

16%

26%

Number of lots traded in 2011: 146.6 million

Source: ICE Futures Europe

% share of contracts traded, 2011

Brent

Gas oil

West Texas

Chart 16

ICE Futures Europe

Emissions

Naturalgas

Others 1%

50%

3%2%

19%

25%

Number of contracts traded in 2011: 269 million

Source: NYSE Liffe

% share of contracts traded, 2011

Short-terminterest rate(STIRs)

Otherinterest rates

Equity index

Chart 14

NYSE Liffe

Individualequities

Commodities

47%

3%

2%

35%

13%

Number of contracts traded in 2011: 1,149 million

CHARTS SHOWING BREAKDOWN OF CONTRACTS

TRADED ON:

- NYSE Liffe

- London Metal Exchange- ICE Futures Europe


14/16

12 www.thecityuk.com



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