——— FINANCIAL POLICY FORUM ———

DERIVATIVES STUDY CENTER

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rdodd@financialpolicy.org	Washington, D.C. 20036

Special Policy Brief 22

Derivatives Trading Volume in

Developing Countries Rises Sharply

– Except for Korea

New Data from the Futures Industry Association

Randall Dodd

Director

Financial Policy Forum

January 28, 2005

The Futures Industry Association just released some of the results of their annual survey of trading volume on derivatives exchanges around the world. The figures for global growth in exchange-traded futures and options show strong growth through the first 10 months of 2004 – except in Korea where the world’s largest derivatives exchange experienced a significant decline in the world’s largest derivatives contract. Excluding the effects from changes in the Kospi 200 equity index option, the number of derivatives contracts traded on exchanges around the world rose by 18.9% in the first 10 months of 2004. Altogether, the global number of derivatives contracts traded on exchanges hit 7.4 billion in the first ten months of 2004 – up 9.2% from 6.78 billion in the same period in 2003.

A major source for this increase in trading volume comes from an interest rate futures traded on the BM&F in Brazil (up 82%) and a similar contract traded on the MexDer in Mexico (up 39%).

In the U.S., trading volume in the Chicago Mercantile Exchanges (CME) Eurodollar future rose 40.5% and that for the Chicago Board of Trade’s (CBOT) future on the 10-year Treasury note rose 30%. The volume of trading in the option on that future rose 34%, and the future for the 5-year T-note rose 40.3% (these figures measured from the same 10 months in 2003).

In contrast to the sharp growth in the U.S. and developing countries, the lead contract on the world’s largest futures exchange – Eurex’s Euro-Bund futures – fell by 8.8%.

By far the most significant reversal in trading volume was the Kospi 200 equity index option, which traded 221.4 million fewer contracts in 2004. Note that only seven exchanges had total trading volume in excess of 200 million contracts in 2003.

The Futures Industry Association also releases a few additional figures to the Financial Policy Forum to cover all of 2004. One important figure showed the ranking of the 60 largest derivatives exchanges around the world. Again, the growing presence of derivatives trading in developing countries stands out. Three of the largest 10 exchanges are in developing countries (Korea, Brazil and Mexico), while nine of the largest 25 exchanges are in developing countries (add China (2), India, South Africa, Taiwan and a second Brazilian exchange). Other developing countries with exchanges in the top 60 include Argentina, Singapore, Hungary (2), Malaysia.

Another important figure shows the total trading volume for all of 2004, and the breakdown of growth in trading volume by type: equity, interest rate, foreign exchange and commodity. The total number of derivatives contracts traded in 2004 was 8.8 billion – up 9% from 8.1 billion in 2003. The fastest growing type was foreign exchange contracts (35.4%) followed by individual equities (28.4%) and interest rate contracts (20.7%). Energy derivatives were up 11.9% but this may include some OTC energy derivatives cleared by NYMEX. Figures for equity indices were overwhelmed by changes in the Kospi 200 option.

In sum, the FIA survey shows continued growth in derivatives trading and provides further indications that a growing source of the growth will be in developing countries. At the same time it shows that interest in trading on exchanges in the US is rising rapidly – surpassing the growth at both Eurex and EuroNext-LIFFE in 2004. It also shows that changes in trading volume often march hand in hand with changes in volatility as the large movements in the US dollar show up as booms in FX futures and options trading. It may be a bad period for volatility, but it’s a great time for volume.

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A more printer friendly version of this Brief is available at:

www.financialpolicy.org/dscbriefs.htm

An article presented most of the data used to prepare this Brief is available from the Futures Industry Association at:

http://www.futuresindustry.org/fimagazi-1929.asp

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