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WFE Focus April 2011
Highlights from the 2010 IOMA survey
Grégoire Naacke
Economist,
WFE

For the seventh consecutive year, the WFE has conducted the annual survey of derivatives exchanges for the International Options Markets Association (IOMA) covering 54 exchanges in 2010. Here are the first results of this annual survey. The full report will be available following the annual IOMA conference, hosted by NSE of India in Mumbai from 1st to 4th May.

Some of the exchanges trade in a wide range of derivatives contracts, while many specialize in a single area of the market. The survey results were analyzed into seven groups representing underlying assets: single equity, equity indices, ETF (Exchange Traded Funds), short-term interest rates (STIR), long-term interest rates (LTIR), currencies and commodities.

The survey was compiled from questionnaire responses sent by IOMA members as well as data from exchange websites. The authors wish to thank exchanges which responded to the questionnaire and especially to exchange staff who gave further assistance in response to enquiries.

The global derivatives market

With a 26% growth rate in 2010, trading in derivatives contracts on regulated exchanges worldwide surged to its highest level since 2004. 22.4 billion derivative contracts were traded on exchanges worldwide (11.2 billion futures and 11.1 billion options) against 17.8 billion in 2009. The highest growth rate (+41%) was observed in the Asia - Pacific region and for the first time volumes traded in this geographical zone were higher than on the two other zones. The number of futures traded increased faster (+36% against +17% for options) and surpassed for the first time the number of options.


Equity derivatives grew rapidly (+14%) in 2010 especially in Asia Pacific region which experienced the highest growth rate (+20%) v region (+8%). Interest rate segment that had been the most heavily hit by the financial crisis grew substantially (+29%), but did not reach again pre-crisis volumes. Commodity derivatives continued to grow rapidly in 2010 (+34%) with Chinese Exchanges accounting for 51% of the traded volumes. Lastly, currency derivatives, with 2.4 billion contracts traded in 2010, remain the smallest segment of organized markets. Nevertheless, driven by the Indian exchanges that accounted for 68% of the volumes traded in 2010, they have experienced triple-digit growth rate in 2010 (+140%). When the Indian exchanges are excluded from statistics, the growth rate of traded volumes in 2010 was still a very strong (+43%).


Equity products

Equity products still represent the dominant share of derivatives trading in terms of number of traded contracts although their relative weight decreased in 2009 and 2010 to 61% (against 68% in 2009 and 70% in 2010). The comparison of volumes and notional values of equity derivatives in the following graph shows that Single Stock and ETF derivatives are maybe most often used by retail investors.



Stock options

In 2010, the number of stock options traded grew by 9% driven by South American and Asian exchanges.

The United States still dominate this market with 60% of the traded volumes. The important 2010 growth rates of NYSE Amex, NASDAQ Options Market (US), NASDAQ OMX PHLX and NYSE Arca were offset by negative growth rates observed on ISE, CBOE and Boston Options Exchange.

The stock options market is less concentrated than other segments of derivatives markets especially in the United States where seven exchanges (CBOE, NASDAQ OMX PHLX, ISE, NYSE Arca, NYSE Amex, NASDAQ Options Market US and Boston Options Exchange) traded important volumes in 2010 and were thus represented in the group of the ten most active exchanges worldwide.

In South America, BM&FBOVESPA surged again in 2010 (+47%) and became the biggest exchange in the world by trading volumes. Other markets in South America, namely Buenos Aires and Mexder also experienced impressive growth rates in 2010.

Volumes remained much smaller in the Asia - Pacific region but very important growth rates were observed in 2010 in this region.

In Europe, on the two biggest exchanges (Eurex and NYSE Liffe) volumes remained nearly stable in 2010. Those two exchanges have developed platforms allowing investors to register OTC trades on the exchange. On Eurex volumes are equally reparted between OTC and non-OTC trades.


Stock futures

Stock Futures increased rapidly in 2010 (+17%) driven by OTC trades registered on Eurex and NYSE Liffe in Europe that grew respectively by 70% and 46% and that were accounting for 38% of the traded volumes worldwide in 2010 (against 29% in 2009).

RTS is also very active in that segment but volumes decreased in 2010 and it is worth noting that the contracts traded on RTS are much smaller than those traded on most other Exchanges.

As in 2009, the biggest exchange in 2010 in terms of Notional Value is National Stock Exchange of India.


Index options

Among equity derivatives, stock index options have experienced the highest growth in 2010 with volumes increasing by 20%.

The global growth rate is heavily influenced by KOSPI 200 options traded in Korea that accounted for 70% of the index options volume traded worldwide in 2010 with 3.5 billion contracts, but all other exchanges in the world taken as a whole increased at the same rapidity (+19%) as Korea (+21%). It is important to keep in mind that KOSPI 200 options are much smaller contracts than those traded in most other exchanges especially in the United States. In terms of Notional Value CBOE weight in Index Options traded in 2010 was higher than Korea Exchange’s.

All other Asian Exchanges also experienced remarkable and even higher growth rates in 2010 for stock index options.

In the American continent, volumes increased by 9.6%, at the same pace as the main market namely CBOE.

In the Europe, Africa and Middle East region, contrasting trends were observed: some exchanges increased sharply such as RTS, Athens, Warsaw or Borsa Italiana while others decreased significantly. The global growth rate was negative (-5.1%).

Index futures

Index Futures were accounting for half of the notional value of equity derivatives traded in 2010. The bigger size of those contracts shows that they are more often used by institutional investors for hedging purpose.

In 2010 volumes increased slower (+5%) than other derivatives markets.

In the Americas, the market is still dominated by CME Group were 87% of the contacts were traded in 2010. Volumes slightly decreased on CME Group.

In Asia, the market is much less concentrated. Five Asian Exchanges are represented in the list of ten most active exchanges in the world for volumes of index futures traded: Hong Kong Exchanges, Korea Exchange, National Stock Exchange of India, Osaka SE and Singapore Exchange. Increase in Osaka and Singapore was offset by the decrease perceived in India.

In the Europe, Africa and Middle East, the three biggest Exchanges for index futures, namely Eurex, RTS and NYSE Liffe experienced substantial growth rate in 2010 allowing this region to grow much faster than Asia and the Americas.

ETF options

Trading on ETF options increased 16% in 2010. The ETF options market remains mainly a US market, with very low volumes in Europe on Eurex mainly OTC, in Asia and in South America. This reflects the uneven development of the underlying market of ETFs which first appeared at the beginning of the 1990’s in the US, and only ten years later in Europe.

In the United States, the market of ETF options is 4.7 times bigger than stock index options market in terms of number of contracts traded but the size of the contracts is much smaller. For example the size of SPDR SP500 ETF options traded on CBOE are one-tenth the size of SP500 options. Volumes of ETF options in the US increased faster in 2010 (+16% against +9% for index options).



Interest rate products

After two years of decline, trading in all types of interest rate products increased significantly in 2010. Nevertheless, these growth rates were not sufficient to reach again the record volumes observed in 2007.

Since 2009, Interest Rate derivatives have been evolving in a context of near-zero leading Central Banks’ interest rates. But, as expected since several weeks, the ECB has just raised its main refinancing interest rate from 1% to 1.25% and will probably be followed by the FED and the Bank of England. This anticipation on interest rates increase has implied a surge in interest rate derivative volumes in the first months of 2011.



Short term interest rate

In 2010, volumes of STIR derivatives increased 27% after the sharp decline observed in 2009 particularly in North America. Nevertheless volumes didn’t reach again the record levels of 2007.

In the Americas, CME Group - that accounted for 59% of the volumes traded in this region in 2010 and for 95% of the notional value – increased by 16% after a decline of 27% in 2009. Most trading in the CME Group is concentrated on Eurodollar futures which remain the most active STIR contracts in the world. Volumes nearly doubled on BMF&BOVESPA, the third biggest exchange in the world for STIR derivatives volumes. In terms of notional value, BMF&BOVESPA is nonetheless much smaller than CME Group and NYSE Liffe (European Markets).

In Europe, the market is also highly concentrated with NYSE Liffe accounting for 97% of the volumes. NYSE Liffe remains the biggest Exchange in the world for STIR options despite a slight decrease of volumes in 2010 while STIR futures increased rapidly in 2010 (+22%).

In Asia volumes of STIR options and futures remain negligible compared to Europe and Americas.



Long term interest rate

LTIR derivatives had experienced the worst decline among all classes of products in 2009. The market recovered in 2010 with a growth rate (+33%) even higher than that of STIR derivatives. Here again the growth rate was nevertheless not sufficient to reach again record levels of 2007. EUREX and CME Group still hold an overwhelming market share for LTIR derivatives trading globally, amounting to 89%.

In the Americas, CME Group experienced one of the highest growth rate (+44%) driven by 10 Year Treasury Note futures traded on CBOT which remained the most active LTIR contracts in the world. In the two other Exchanges with significant volumes namely Montréal Exchange and Mexder volumes also increased very rapidly (respectively + 20% and +50%).

In Asia Pacific, four Exchanges are trading significant numbers of LTIR derivatives: Australian Securities Exchange, Korea Exchange, Tokyo Financial Exchange Inc. and Tokyo Stock Exchange Group. Three of them experienced positive growth rate in 2010.

In Europe, Eurex grew rapidly (+23%) but at a slower pace than CME Group and the two biggest Asian Exchanges: ASX and Korea Exchange. The Euro-Bund futures on Eurex remained the second most active contracts worldwide. NYSE Liffe and NASDAQ OMX Nordic also increased rapidly (respectively +19% and +29%) but volumes remains much lower than on Eurex.



Commodity products

Since 2004, the development of commodity derivatives markets is impressive. Volumes only stopped growing during one year in 2008. In 2010 the growth rate of volumes (+34%) was higher than for all other segments of organized derivatives markets except currency derivatives.

CME Group still dominates the scene for commodity derivatives and is present with important volumes on all the segments (Agricultural, Energy and Metal) via its various trading platforms: CME, CBOT and NYMEX. CME Group has also developed trading facilities to process OTC trades with its platform Clearport. In 2010, OTC trades registered on CME Group decreased slightly (-9%) whereas on-exchange trades increased by 48%. Other Exchanges active in the trading of Agricultural derivatives in the Americas, namely ICE and BM&FBOVESPA also increased rapidly in 2010 but volumes remain significantly lower.

In Asia Pacific, the growth rate of volumes that was close to the one observed in Americas (+36% against +35%) was mainly driven by Chinese Exchanges that were accounting for 87% of the volumes traded in that region. Evolutions were however contrasted among those Chinese Exchanges: Shanghai and Zhengzhou surged (respectively by +43% and +118%) whereas Dalian Commodity Exchange slightly decreased (-3%). On Shanghai Futures Exchange, 99% of the volumes are concentrated on metals and rubber, Dalian Exchange is specialized in soybean products (63% of the volumes) and in Zhengzhou 79% of the contracts traded are linked to white sugar and cotton.

In Europe, ICE Futures increased significantly on energy derivatives (+31%) whereas London Metal Exchange slightly decreased (-1%) on metal derivatives. Other Exchanges experienced high gross rates but volumes remain much lower.



Currency products

With 2.4 billion contracts traded in 2010, currency derivatives remain the smallest segment of organized markets but due to the huge development of this market in India, currency derivatives experienced - as in 2009 - the highest growth rate (+140%) when compared to other segments of the derivatives market.

The impressive growth rate of currency derivative volumes mainly reflects the situation of the two biggest exchanges in terms of number of contracts traded namely MCX-SX and National Stock Exchange of India, where the number of contracts traded surged 294% and 221% respectively and that were accounting for 68% of the volumes traded worldwide in 2010. In other Asian Exchanges, Tokyo Financial Exchange Inc., Korea Exchange and Osaka SE, volumes also increased very fast.

In the Americas, CME Group and BM&FBOVESPA, the two biggest Exchanges, are smaller than Indian Exchanges in terms of number of contracts traded but much bigger in terms of notional value. With a notional value of 30 trillion USD, the contracts traded on CME Group in 2010 were representing an amount 18 times bigger than what was traded in India the same year. CME Group increased 48% and BM&FBOVESPA 22%. In the United States, ICE Futures is also present with smaller volumes but those volumes doubled in 2010. In South America, Rofex and Mexder increased respectively by 21% and 245%.

In Europe, the volume growth was driven by RTS that experienced a 166% growth rate in 2010 but as on Indian Exchanges the notional value is much smaller than on CME Group and BM&FBOVESPA. Volumes on other European Exchanges decreased or remained stable.

About Grégoire Naacke

Grégoire recently joined the WFE in 2011 to work as an economist. He previously worked (from 2002 to 2010) as a consultant for IEM Finance (French independent consulting firm specialized on financial markets organization and savings markets created by Didier Davydoff, former Director at Paris Stock Exchange) and as an Economist at the European Savings Institute (a non for profit organization presided by Jacques de Larosière aiming at promoting research on savings-related topics in Europe). In 2008 he was in parallel Scientific Adviser at the Centre d'Analyse Stratégique, an organization working directly under the direction of the French Prime Minister and whose objective is to assist the government in defining and implementing its economic, social, environmental and cultural policies. Grégoire graduated in Money, Banking and Finance from University Paris 1 Panthéon Sorbonne.

Equity derivatives grew rapidly (+14%) in 2010 especially in Asia Pacific region which experienced the highest growth rate (+20%) followed by the Americas (+10%) and Europe Africa Middle East region (+8%). Interest rate segment that had been the most heavily hit by the financial crisis grew substantially (+29%), but did not reach again pre-crisis volumes. Commodity derivatives continued to grow rapidly in 2010 (+34%) with Chinese Exchanges accounting for 51% of the traded volumes. Lastly, currency derivatives, with 2.4 billion contracts traded in 2010, remain the smallest segment of organized markets. Nevertheless, driven by the Indian exchanges that accounted for 68% of the volumes traded in 2010, they have experienced triple-digit growth rate in 2010 (+140%). When the Indian exchanges are excluded from statistics, the growth rate of traded volumes in 2010 was still a very strong (+43%).

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