Last Year’s Over-the-Counter Derivatives Trading Down 5.2% YoY... "Impact of COVID-19"

[Asia Economy Reporter Park Jihwan] The scale of over-the-counter (OTC) derivatives transactions decreased by 5.2% compared to the previous year.

According to the "2020 Financial Companies OTC Derivatives Transaction Status" announced by the Financial Supervisory Service (FSS) on the 16th, the total transaction volume of OTC derivatives by domestic financial companies last year was 1,701.9 trillion KRW, down 92.6 trillion KRW (5.2%) from 1,794.5 trillion KRW the previous year.

The decrease in OTC derivatives transactions last year was due to a reduction of 65.7 trillion KRW in currency forwards and 15.5 trillion KRW in interest rate swaps. Currency forwards are contracts to buy or sell a specific currency at a predetermined price at a future date, used as a means to reduce foreign exchange risk. 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, "Last year, due to the global economic slowdown caused by the spread of COVID-19, reduced global trade, contraction of the real economy, and a low interest rate environment aimed at economic recovery, low levels of interest rate volatility were maintained. As a result, demand for currency and interest rate hedging by corporations and financial institutions decreased, leading to a decline in OTC derivatives transactions."

At the end of last year, the outstanding balance of OTC derivatives was 993.5 trillion KRW, down 50 trillion KRW (4.8%) from 1,043.5 trillion KRW at the end of the previous year. By underlying asset, currency-related transactions (1,325.0 trillion KRW) accounted for the largest share at 77.9%, followed by interest rates (352.7 trillion KRW), equities (19.3 trillion KRW), and others (2.7 trillion KRW). Based on outstanding balances, interest rates (640.3 trillion KRW), currency (337.6 trillion KRW), credit (7.5 trillion KRW), and equities (6.4 trillion KRW) ranked in that order.

Last year, the scale of currency-related OTC derivatives transactions was 1,325.0 trillion KRW, down 67.9 trillion KRW (4.9%) from 1,392.8 trillion KRW the previous year. This was analyzed to be due to a decrease in the scale of foreign trade related to corporate exports and imports caused by the global economic slowdown and reduced global trade due to the spread of COVID-19.

For interest rate OTC derivatives, the continued low level of interest rate volatility led to a decrease in demand for interest rate hedging. Last year, the transaction volume of interest rate-related OTC derivatives was 352.7 trillion KRW, down 23.0 trillion KRW (6.1%) from 375.7 trillion KRW the previous year.

The financial sector that accounted for the largest share of OTC derivatives transaction volume last year was banks. Banks' transaction volume was 1,353.5 trillion KRW, accounting for 79.5%. Securities companies (15.0%) and trusts (4.4%) followed. Based on outstanding balances, banks (800.3 trillion KRW, 80.5%), securities companies (160.6 trillion KRW, 16.2%), and insurance (16.0 trillion KRW, 1.6%) ranked in that order.

Last year, the transaction volume of OTC derivatives intermediated or arranged by financial companies was 23.13 trillion KRW, an increase of 1.81 trillion KRW (8.5%) from 21.32 trillion KRW in the same period the previous year.

An FSS official stated, "In order to proactively respond to the global trend of strengthening supervision of the OTC derivatives market and the risk management and supervision of financial companies, it is necessary to strengthen the risk management system related to OTC derivatives transactions."

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