July 22, 2016

The True Size of the OTC Market is Bigger Than Ever

Adjusting the OTC market notionals to re-calculate the effects of compression puts the OTC market at a bigger size than ever, but the reported notionals say otherwise

ISDA published their analysis of the public OTC market size data, from the BIS statistics. The original PDF is linked from their home page directly here or attached below. The BIS data can be seen on their website here. In the chart below the grey line shows how the size of the OTC market would be if compression hadn't taken place and cleared double counting is allowed, the theoretical notional would be around $857trn, whereas compression has reduced the total BIS reported notional to $384trn. The paper makes clear that the effects of compression and clearing need to be analysed to arrive at a consistent measurement of the size of the OTC market, the key below explains the final graph in the paper.

  • Blue line: BIS reported figures
  • Grey line: Market size without compression, but with cleared double counting
  • Red line: Market size without cleared double counting, but with compression
  • Orange line: Market size without compression, and removing cleared double counting (so a figure representing the actual amount of business open)

In the chart above, the orange line is the end result of the ISDA analysis taking out compression and adjusting for cleared double counting. Given some of the hysterical reporting of the size of the OTC market by some websites and journals, this analysis will either send them into a frenzy of fear or baffle them into confused silence. 

In contrast the BIS data on gross market value of all the above contracts shows a decrease, seen in the chart below, to around $14.5trn, which makes the OTC market way smaller than Bonds, Equities and Loans in terms of risk, see this article here on why.

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