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Foreign Exchange

Exchange-traded derivative boom continues; FX fastest-growing market

Exchange-traded derivatives (ETDs) continue to boom, with FX the fastest-growing asset class in 2011, according to data from the World Federation of Exchanges (WFE) on the number of contracts traded.

The WFE, which conducted its second annual survey on the derivatives market, found that almost 25 billion derivative contracts – made up of 12 billion futures and 13 billion options – were traded on exchanges worldwide, an 11% increase from the 22.4 billion traded in 2010. Currency derivatives trading volume grew 16% in 2011, the highest-growth rate of any asset class, overtaking the commodity derivatives market in terms of the number of contracts traded.

The number of commodities contracts traded on exchanges shrank 6% during the same period, due mainly to a 34% decrease in volumes on mainland Chinese exchanges, the report said.

A total of 2,790 billion currency derivatives were traded on exchanges, representing 11% of all ETD volumes in 2011. Commodities and interest-rate derivates made up 11% and 14% respectively, while equity derivatives continue to account for the bulk of all ETD volume, making up 64% in 2011.

FX futures, which make up the lion’s share of the exchange-traded currency derivatives market, rose 7%, with 2.5 billion contracts changing hands in 2011. However, the surge in currency derivatives was largely driven by a sharp rise in FX options volume, which grew more than 400% in 2011, although admittedly from a low base.

The survey shows 289 million FX option contracts were traded on exchanges in 2011, up from 56 million the previous year. According to WFE, this was mainly driven by rising activity on the National Stock Exchange of India (NSEI), which represented 253 million FX options contracts in 2011.

However, it is important to bear in mind that WFE’s analysis looks only at the number of contracts traded, not the notional size.

A report published last year by WFE economist Grégoire Naacke showed that while the NSEI had the second-highest number of FX contracts traded in 2010 – three times higher than on the CME – the notional size of these contracts was far smaller. NSEI accounted for just 1.6% of total value in USD, while the CME accounted for nearly half. Figures for 2011 will be released at a later date.

“Excluding contracts traded in India, the growth rate of currency options in 2011 is considerably smaller, but remains strong at 6%,” says Naacke.

The WFE is the trade association for the operators of regulated financial exchanges, comprising 54 members from around the globe.

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