“Gross market value and gross credit exposure significantly increased in 2020 due to pandemic-related market uncertainty. The decline in the second half of 2021 represents a return to pre-pandemic levels,” said ISDA.

OTC derivatives notional outstanding totalled $598.4 trillion at the end of December 2021, 2.8% higher compared to year-end 2020 and 1.9% lower compared to mid-year 2021, according to the latest data from the Bank for International Settlements (BIS), as reported by ISDA. However, some of this change reflects a seasonal pattern, whereby notional outstanding tends to increase in the first half of the year and decline in the second half.

The gross market value of OTC derivatives contracts for at the end of 2021 was 21.2% lower compared to year-end 2020, and 1.4% lower versus mid-year 2021. Gross credit exposure (e.g., gross market value after netting) also decreased by 24.7% over the year, although most of the decline occurred in the first half, with a loss of 6.6% in H2.

Market participants reduced their mark-to-market exposure by about 79.6% at year-end 2021 due to close-out netting. “This credit exposure is further reduced by the collateral that market participants post for cleared and non-cleared derivatives transactions,” pointed out BIS.

Overall, firms posted $323.4 billion of initial margin (IM) for cleared interest rate derivatives (IRD) and single-name and index credit default swaps (CDS) at all major central counterparties (CCPs) at year-end 2021. The 20 largest market participants (phase one firms) collected $286 billion of IM for their non-cleared derivatives transactions at year-end 2021.

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There is a strong case for policy intervention related to cryptocurrencies such as Bitcoin, according to the general manager at the Bank for International Settlements (BIS).

Speaking at the House of Finance at Goethe University in Frankfurt this week, Agustín Carstens urged central banks to work alongside financial authorities and regulators to intervene in cryptocurrencies.

He explained they should pay special attention to two aspects; ties to linking cryptocurrencies to real currencies and levelling the playing field, meaning ‘same risk, same regulation’ with no exceptions.

“While cryptocurrencies may pretend to be currencies, they fail the basic textbook definitions,” Carstens said. “Most would agree that they do not function as a unit of account. Their volatile valuations make them unsafe to rely on as a common means of payment and a stable store of value.”

He went on to describe cryptocurrencies as ”piggybacking” on the institutional infrastructure that serves the wider financial system, allowing it to gain a “semblance of legitimacy”. 

“Bitcoin is not functional as a means of payment,” he added. “If the only ‘business case’ is use for illicit or illegal transactions, central banks cannot allow such tokens to rely on much of the same institutional infrastructure that serves the overall financial system and freeload on the trust that it provides.”

Bitcoin’s price plummeted to below $6,000 this week, having reached unprecedented highs of $19,000 in November last year.

The surge in cryptocurrency trading and its extreme volatility has drawn the attention of financial regulators worldwide. Last month the value of Bitcoin fell dramatically amid news of plans to ban trading of the asset in South Korea.

Institutional interest in cryptocurrency trading grew with the launch of Bitcoin Futures by both CME Group and Cboe at the end of last year, although regulators have recently stepped in and curbed the prospect of Bitcoin ETFs.

The Securities and Exchange Commission asked firms to withdraw requests to launch ETF products until multiple issues have been resolved, including extreme volatility, liquidity and valuation.

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The Bank for International Settlements (BIS) has released its ‘Global FX Code of Conduct’, set to establish a “common set of guidelines” for market participants.

The rules are organised into six principles; ethics, governance, information sharing, execution, risk management, and confirmation and settlement processes.

Market participants are “expected to behave in an ethical and professional manner to promote the fairness and integrity of the FX market.”

FX Scandals led to mass fines across investment banks, with Bank of America, UBS, RBS, JP Morgan, Citigroup and Barclays paying a combined $5.6 billion to settle allegations of rigging foreign exchange markets.

Commenting on BIS’s Global Code, James Kemp, Global Financial Markets Association’s managing director of its FX division, said the initiative is set to restore confidence in global markets, which is “fundamental to the functionality of [the] industry.”

Kemp added: “We believe the introduction of a single code will create a common reference point to encourage good practice and re-build public confidence in the FX industry.”

Thomson Reuters’ global head of FRC trading Phil Weisberg, said the firm operates at the heart of the FX market.  

He added: “We will help our customers understand their responsibilities under the Global Code and encourage their active engagement in the interests of the wider FX market.”

BIS explained in its code: “The Global Code will evolve, as required, over time as the FX Market evolves.”

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