Last Year’s Over-the-Counter Derivatives Trading Volume Slightly Increased... Rising Demand for Dollar Hedging

2023 Financial Companies Over-the-Counter Derivatives Trading Status

Last year, the scale of over-the-counter (OTC) derivatives transactions by domestic financial companies showed a slight increase. Due to the rise in demand for currency hedging amid the strengthening of the US dollar, the transaction amount of currency forwards increased, while the transaction volume of interest rate swap products for interest rate hedging decreased as domestic interest rate volatility declined.

According to the Financial Supervisory Service (FSS) on the 21st, the total OTC derivatives transaction volume of domestic financial companies in 2023 was 2,470.4 trillion KRW, an increase of 15.5 trillion KRW (0.6%) compared to the previous year (2,454.8 trillion KRW).

The transaction volume of currency-related OTC derivatives was 1,837.9 trillion KRW, up 134.8 trillion KRW (7.9%) from the previous year (1,703.0 trillion KRW).

By transaction type, the currency forward transaction volume was 1,714.4 trillion KRW, accounting for the majority (93.3%) of all currency-related transactions. A currency forward is a contract to buy or sell a specific currency at a predetermined price at a future date to hedge foreign exchange risk.

By product, currency-related transactions (1,837.9 trillion KRW) accounted for the majority at 74.4%. Next were interest rate-related transactions at 599.4 trillion KRW (24.3%), equity-related at 26.3 trillion KRW (1.1%), and credit-related at 2.4 trillion KRW (0.1%).

The FSS explained, "The increase in currency forward transaction amounts was due to increased demand for currency hedging amid the strengthening of the US dollar in 2023. Conversely, compared to 2022, the reduction in domestic interest rate volatility led to decreased demand for interest rate hedging, resulting in a decline in interest rate swap transaction amounts."

The outstanding balance of OTC derivatives transactions was 1,329.1 trillion KRW, an increase of 108.0 trillion KRW (8.8%) compared to the end of the previous year (1,221.0 trillion KRW). Among these, interest rate-related transactions accounted for the largest share at 851.8 trillion KRW (64.1%). Next were currency-related at 455.6 trillion KRW (34.3%), credit-related at 7.8 trillion KRW (0.6%), and equity-related at 10.4 trillion KRW (0.8%).

Within the OTC derivatives market, by financial sector, banks accounted for the majority of transactions at 1,906.0 trillion KRW (77.2%). Securities firms accounted for 410.6 trillion KRW (16.6%), and trusts for 110.4 trillion KRW (4.5%). The outstanding balance was also largest in banks at 1,024.7 trillion KRW, representing 77.1%.

Meanwhile, the scale of OTC derivatives brokerage and underwriting was 35.02 trillion KRW, a decrease of 4.29 trillion KRW (10.9%) compared to the previous year (39.31 trillion KRW). In contrast, the brokerage and underwriting transaction amount for interest rate-related OTC derivatives increased by 1.03 trillion KRW (15.9%) to 7.52 trillion KRW compared to the previous year.

The FSS analyzed, "This was due to increased brokerage and underwriting performance in interest rate forwards and interest rate swaps by domestic branches of foreign securities firms and banks. While brokerage and underwriting performance for equity-related OTC derivatives increased compared to the previous year, performance for currency-related OTC derivatives decreased compared to the previous year."

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