ISDA paper delves into trends in OTC equity derivatives: CFDs, swaps, forwards, options

Rick Steves

Examining the product landscape, the OTC EQD market encompasses a range of instruments, including swaps, forwards, options, contracts for difference, and other products. A noteworthy trend highlighted in the paper is the growth of equity forwards and swaps in comparison to OTC equity options.

reporting

The International Swaps and Derivatives Association (ISDA) has published a paper delving into the multifaceted space of over-the-counter (OTC) equity derivatives (EQDs), offering a thorough examination of their benefits and diverse use cases.

The paper meticulously analyzes the market landscape, encompassing fluctuations in size across geographies, product offerings, and notional outstanding maturities.

Equity forwards and swaps up against OTC equity options

Diverse market participants, including institutional investors, asset managers, and hedge funds, have been leveraging OTC EQDs for a spectrum of purposes, from hedging to market access and portfolio diversification. Notably, the customization potential and flexibility of OTC EQDs make them particularly appealing for investment hedges.

The ISDA publication sheds light on the dynamic nature of the OTC EQD market, showcasing stability in size over the past 15 years, with fluctuations within the $6.3 trillion to $7.6 trillion range. Despite this stability, OTC EQDs constitute a relatively modest fraction, representing 1-2% of the broader OTC derivatives market.

Examining the product landscape, the OTC EQD market encompasses a range of instruments, including swaps, forwards, options, contracts for difference, and other products. A noteworthy trend highlighted in the paper is the growth of equity forwards and swaps in comparison to OTC equity options.

Geographically, the publication reveals a significant shift in the dominance of the OTC EQD market, with the United States now emerging as the central region for total notional outstanding. This marks a departure from the once-leading position held by European developed countries.

The paper also highlights the prevalence of short maturities in OTC EQDs, with 63% of notional outstanding having a remaining maturity of one year or less.

In tandem with these market dynamics, the regulatory framework governing OTC EQDs has evolved. The ISDA underscores the increased regulation and transparency, with stringent measures such as trade reporting, margining, and other rules now in place. Regulatory bodies, including the US Commodity Futures Trading Commission, the US Securities and Exchange Commission, the European Securities and Markets Authority, and the UK Financial Conduct Authority, have played pivotal roles in shaping the structured oversight of OTC EQDs.

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