Last Year’s Over-the-Counter Derivatives Transactions Hit Record High Again... 10% Increase Compared to Previous Year

[Asia Economy Reporter Ji-hwan Park] The scale of over-the-counter (OTC) derivatives transactions last year once again set a new record high. This marks the fourth consecutive year of record-breaking since surpassing the previous peak in 2008 during the 2016 global financial crisis.

According to the "2019 OTC Derivatives Transactions Status of Financial Companies" released by the Financial Supervisory Service (FSS) on the 22nd, the total transaction volume of OTC derivatives by domestic financial companies last year was KRW 1,794.5 trillion, an increase of KRW 164.1 trillion (10.1%) from KRW 1,630.4 trillion the previous year. After exceeding the all-time high of KRW 1,251.2 trillion in 2008 during the global financial crisis with KRW 1,264.4 trillion in 2016, it has set a new record for four consecutive years.

The significant increase in OTC derivatives transactions last year was due to increased hedge demand amid growing volatility and uncertainty in domestic and international financial markets such as interest rates, exchange rates, and stock prices, leading to increased transactions in currency forwards (KRW 134.5 trillion) and interest rate swaps (KRW 23.3 trillion).

Currency forwards are contracts used to reduce foreign exchange risk, agreeing to buy or sell a specific currency at a predetermined price at a future date. Interest rate swaps refer to transactions where interest payments (mainly fixed and floating rates) on a notional principal are periodically exchanged to hedge interest rate risk.

An FSS official explained, "With the increase in overseas trade volume and the expansion of domestic financial companies' asset management scale, the demand for related risk hedging has increased, leading to a continuous rise in OTC derivatives transaction volumes."

At the end of last year, the outstanding balance of OTC derivatives was KRW 1,043.5 trillion, up KRW 115.6 trillion (12.5%) from KRW 927.9 trillion at the end of the previous year. By underlying asset, currency-related transactions accounted for the largest share at 77.6% with KRW 1,392.9 trillion. This was followed by interest rate (KRW 375.7 trillion), equity (KRW 20.7 trillion), and credit (KRW 2.9 trillion). By outstanding balance, interest rate (KRW 646 trillion), currency (KRW 379.5 trillion), credit (KRW 8.1 trillion), and equity (KRW 8 trillion) ranked in that order.

Last year, the scale of currency-related OTC derivatives transactions was KRW 1,392.9 trillion, an increase of KRW 139.1 trillion (11.1%) from KRW 1,253.8 trillion the previous year. This was attributed to increased volatility in the foreign exchange market due to external risk factors such as the US-China trade negotiations, Brexit, and the Hong Kong situation.

For interest rate OTC derivatives, the expansion of bond market volatility influenced by three US interest rate cuts amid weak global economic indicators was a factor. Last year, the transaction volume of interest rate-related OTC derivatives was KRW 375.7 trillion, up KRW 26.4 trillion (7.6%) from KRW 349.3 trillion the previous year.

Among financial sectors, banks accounted for the largest share of OTC derivatives transaction volume last year. Banks' transaction volume was KRW 1,482.7 trillion, representing 82.6%. Securities companies (12.7%) and trusts (including asset management, 3.4%) followed. By outstanding balance, banks (KRW 843.6 trillion, 80.8%), securities companies (KRW 163.8 trillion, 16.1%), and insurance (KRW 16.5 trillion, 1.6%) ranked in that order.

The transaction volume of OTC derivatives intermediated or arranged by financial companies last year was KRW 21.32 trillion, an increase of KRW 1.57 trillion (7.9%) from KRW 19.75 trillion in the same period the previous year.

The FSS plans to strengthen the risk management system related to OTC derivatives transactions in preparation for the increasing trend of OTC derivatives transactions and diversification of counterparties. An FSS official stated, "As part of the G20 OTC derivatives market reforms, we plan to steadily implement the trade repository system and the initial margin exchange system for non-centrally cleared OTC derivatives transactions."

This content was produced with the assistance of AI translation services.