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Equity derivatives no longer rule derivatives trade

Futures and options on equities no longer make up the majority of the global derivatives trade, eclipsed by a combination of record low market volatility and surging demand from Asia for commodity and currency hedges.

Volumes of equity derivatives fell 11 per cent year on year in 2016 to 11.2bn contracts traded, according to annual data released on Thursday by the World Federation of Exchanges.

They now account for just 45 per cent of the total market, although they remain the world’s most actively traded derivative, the WFE added. It was the first time they had been a minority since the WFE, a trade body for the world’s bourses, began compiling records in 2005.

Only derivatives of exchange traded funds, mainly options, registered a rise, of 7 per cent. They account for only 15 per cent of the total equity derivatives volumes.

Analysts have argued that equity derivatives trading is closely correlated to market volatility, a measure of how fearful investors are about sudden market moves. Closely watched indices such as the CBOE’s Vix and the MSCI US Historical volatility index are at their lowest level in decades.

“Equity market volatility around the world closely tracks that in the US. US volatility closely tracks US credit spreads. It does suggest that the fixed income reach for yield has been associated with rising equity prices and especially falling volatility,” said Owen Jones, an analyst at Citi, in a research note this week.

He said that demand for equity derivatives could increase this year as credit spreads widened, driven by a combination of central banks slowing their asset purchases, a US rates rise and investor concern about political risk in Europe.

The WFE report, with data from 47 of the world’s main exchanges, found that global volumes of derivatives rose 2.2 per cent to 24.9bn contracts in 2016. The top line was bolstered by further growth in Asia.

Global commodity derivatives revenues rose 27.5 per cent to 6.8bn contracts and currency derivatives 10.4 per cent to 2.9bn contracts year-on-year, respectively. Most of the world’s actively traded currency derivatives were contracts that tracked local currency dollar exchange rates, the WFE said.

Globally, trading is concentrated in three exchanges with the Dalian Commodity Exchange, the Shanghai Futures Exchange and the US’s CME Group accounting for just over 60 per cent of the market. The most actively traded contracts were a mixture of agricultural, base metal and energy contracts.

Interest rate futures rose 5.5 per cent to 3.4bn contracts, their first increase in more than three years. More than 80 per cent of the global market is concentrated between three exchanges, the CME, Deutsche Börse’s Eurex and ICE Futures Europe.