Belgium, Portugal and the Netherlands together with the main deriv-
ative market in the United Kingdom, the London International Finan-
cial Futures & Options Exchange (LIFFE, pronounced ‘life’). Other
merged markets include, The Singapore Exchange (SGX), formed
from the merger of the Singapore International Monetary Exchange
(SIMEX) and the Stock Exchange of Singapore and the joining of the
Hong Kong Stock Exchange and the Hong Kong Futures Exchange to
create HKEx.
Other significant developments have included the approval by the
US Regulators and the launch by Eurex, the German-based exchange,
of a new exchange in the United States, Eurex US, to directly compete
with the established Chicago markets.
Also in the United States was the combining of the clearing for the
two largest futures markets, the CBOT and the CME, with resulting
efficiencies and cost savings for members.
The first options markets
Like futures, the use of options can be traced back to the eighteenth
century, and in certain forms as far back as the Middle Ages. In the
eighteenth century, options were traded in both Europe and the
United States, but unfortunately due to widespread corrupt practices
the market had a bad name. These early forms of options contracts
were traded between the buyer and the seller and had only two pos-
sible outcomes. The option was delivered (i.e. the underlying product
changed hands at the agreed price) or it expired without the buyer
taking up his ‘option’ to exercise the contract for delivery. In other
words there was no ‘trading’ of the option positions and, still worse,
in the early days just as we saw with forward trades there was no
guarantee that the seller would honour his obligation to deliver the
product if the buyer exercised his option.
However, there was little doubt that options were considered highly
flexible and desirable products and therefore in April 1973 the CBOT
proposed a new exchange, the Chicago Board Options Exchange
(CBOE), to trade stock options in a standardised form and on a
recognised market where performance of the options contract on
exercise was guaranteed. This was the birth of what we call today
‘traded options’.
Since 1973, option markets have grown in the United States and
of course globally. Like futures markets they cover a wide range
6 Clearing and settlement of derivatives
of products, including options on futures, a derivative with another
derivative as the underlying. Although options have been trading
on exchange for a shorter time than futures, they are nevertheless
extremely popular with both hedgers and speculators alike.
The Australian Options Market (now owned by the Australian Stock
Exchange) opened in 1976. In 1978, the first traded options markets
started trading in Europe. The European Options Exchange opened in
Amsterdam followed soon after by the London Traded Option Market
(now owned by the LIFFE).
Other futures and options markets followed. The London Inter-
national Financial Futures & Options Exchange opened for business
in 1982, the Singapore International Monetary Exchange in 1984
and the Hong Kong Futures Exchange in 1985. Many new markets in
the Americas, Europe and the Far East followed these during the late
1980s and the early 1990s.
Today, as we have already noted, the derivatives industry is truly
global. To illustrate just how big the industry is we only need to look
at the volume of contracts traded on worldwide derivatives exchanges
during 2003, which totalled a staggering 8 billion-plus contracts.
We must also take into account the derivatives business that is not
traded on exchanges. In 2003, the market in the interest rate seg-
ment of OTC derivatives was estimated by the Bank for International
Settlements (BIS) to be valued at $142 trillion.
Over-the-counter derivatives tend to be more specialised products
that are negotiated and very much tailored to the user’s require-
ments. Swaps, forwards and forward rate agreements (FRAs) are
traded over-the-counter and so too are many different types of
options making the combined on- and off-exchange volume of busi-
ness in options massive.
The industry, both exchange-traded and OTC, continues to grow
with new exchanges and new products providing users with the
medium to control risk.
More recently, products introduced on- and off-exchange include
credit derivatives, weather derivatives, share futures, flex options and
‘mini’ (smaller contract size than the standard futures contract) con-
tracts on, for instance, various equity indices.
As the table of the world’s leading exchanges (Table 1.1) and the
graph of OTC values (Table 1.2) illustrates, today the derivatives
industry is truly global and also enormous. Equally it is a diversified
industry as the following list of the 20 highest volume contracts in
the first half of 2004 shows (Table 1.3).
Development of futures, options and OTC derivatives 7
As can be seen, there are many diverse products in the list and yet
all of them with the exception of No. 1 soybean futures on the DCE
are financial-based products. This does not mean that commodities
are not important products; for instance, according to the latest data
for the first six months of 2004 from the FIA, global agriculture trad-
ing has increased by 31.5 per cent to 177.3 million contracts.
In the United States, agricultural products traded 40.0 per cent
higher in the first half of 2004, with 70.1 million contracts. Outside
the United States, agricultural commodities were up by 24.2 per cent
to 107.3 million contracts.
The top global agriculture contract, Dalian Commodity Exchange’s
soybean futures, was up by 10.8 per cent to 31.5 million contracts.
8 Clearing and settlement of derivatives
Table 1.2 Global OTC derivatives market turnover by instrument.
1
Instrument Average daily turnover in April, in billions of
US dollars
1995 1998 2001 2004
A. Foreign exchange instruments 45 97 67 140
Currency swaps 4 10 7 21
Options 41 87 60 117
Other 1 0 0 2
B. Interest rate instruments
2
151 265 489 1025
FRAs 66 74 129 233
Swaps 63 155 331 621
Options 21 36 29 171
Other 2 0 0 0
C. Estimated gaps in reporting 4131955
D. Total 200 375 575 1220
Memo
Turnover at April 2004 180 410 690 1220
exchange rates
3
Exchange-traded derivatives
4
Currency instruments 17 11 10 22
Interest rate instruments 1204 1371 2170 4521
1
Adjusted for local and cross-border double-counting.
2
Single currency interest rate contracts only.
3
Non-US dollar legs of foreign currency transactions were converted into original currency
amounts at average exchange rates for April of each survey year and then reconverted into US
dollar amounts at average April 2004 exchange rates.
4
Sources: FOW TRADEdata; Futures Industry Association; various futures and options
exchanges.
Soymeal futures at the same exchange-traded 47.1 per cent higher,
reaching 11.3 million contracts traded. At the Tokyo Grain
Exchange, non-GMO soybean futures nearly tripled in volume, up by
195.1 per cent to 5.6 million contracts.
Corn futures at the CBOT were the most widely traded US agri-
cultural commodity, up by 51.2 per cent to 13.8 million contracts
in the first half. This contract also had the greatest absolute volume
increase within global agricultural products, up by 4.7 million in the
first six months of 2004.
While trading in precious metals was up in the United States by
41.0 per cent to 13.9 million contracts in the first half, trading in these
products outside the United States declined by 14.5 per cent
to 19.4 million contracts. Gold futures at the New York Mercantile
Exchange rose by 29.9 per cent to a total of 7.7 million contracts in the
first half, while gold options trading at Nymex climbed by 41.1 per cent
to 2.4 million contracts. Silver futures trading at Nymex also grew, up
by 47.8 per cent to 2.7 million contracts for the same period.
Development of futures, options and OTC derivatives 9
Table 1.3 Top 20 Contracts by volume (in millions of contracts).
Contract Exchange Jan.–Jun. 04 Jan.–Jun. 03 % Change
Kospi 200 Options Kofex 1,347.50 1,372.40 1.80
3-Month Eurodollar Futures CME 139.7 100.1 39.60
Euro-Bund Futures Eurex 119.4 129.3 7.70
TIIE 28 Futures MexDer 100.6 93.0 8.10
10-Year T-Note Futures CBOT 94.6 66.5 42.20
E-mini S&P 500 Index Futures CME 85.8 83.4 2.80
3-Month Euribor Futures Euronext 84.6 70.1 20.70
Euro-Bobl Futures Eurex 83.7 78.3 6.90
Euro-Schatz Futures Eurex 66.0 59.6 10.70
3-Month Eurodollar Options CME 65.3 55.1 18.50
DJ Euro Stoxx 50 Futures Eurex 62.5 62.0 0.80
Interest Rate Futures BM&F 53.0 24.1 120.10
Five-Year T-Note Futures CBOT 49.3 33.2 48.30
E-mini Nasdaq 100 Futures CME 38.6 32.1 20.20
DJ Euro Stoxx 50 Options Eurex 37.0 30.9 19.80
3 Month Euribor Options Euronext 36.7 33.6 9.40
CAC 40 Index Options Euronext 36.3 36.3 0.00
T-Bond Futures CBOT 35.5 30.5 16.50
No. 1 Soybean Futures DCE 31.5 28.4 10.80
Kospi 200 Futures Kofex 27.8 33.4 16.80
Source: Futures Industry Association.
The decline outside the United States was mainly due to a slowdown in
gold futures trading at the Tokyo Commodity Exchange, where volume
in that contract declined by 30.0 per cent to 10.2 million contracts in
the first half.
Non-precious metals trading jumped by 36.3 per cent globally to
55.9 million contracts. At the Shanghai Futures Exchange, copper
futures trading increased by 203.0 per cent to 11.0 million contracts,
while aluminium futures trading climbed by 455.9 per cent to
4.9 million contracts. The largest contract in this category was the
London Metal Exchange’s aluminium futures, up by 12.3 per cent to
14.7 million contracts.
Outside the United States, energy trading fell 6.2 per cent to
52.3 million contracts, but within the United States trading in energy
commodities grew 8.4 per cent to 62.2 million contracts. Crude oil
futures at Nymex, the world’s most actively traded energy contracts,
gained by 12.0 per cent to 25.7 million contracts in the first half
of 2004. Unleaded regular gas futures at Nymex were also up by
15.0 per cent to 6.7 million contracts. Gasoline futures were down
globally by 27.2 per cent at the Central Japan Commodities Exchange
to 6.8 million contracts, by 11.9 per cent at the Tokyo Commodities
Exchange to 11.5 million contracts, and by 15.3 per cent at Nymex to
8.3 million contracts.
It is also an industry undergoing continuous development and
change; for instance, the growth of electronic trading and the emer-
gence of new exchanges to challenge the traditional established
markets. Once again, according to the FIA several new exchanges
successfully began operating in the first half of 2004 in direct com-
petition with existing US derivatives exchanges. Eurex US launched
Treasury futures trading in February.
In Europe, Euronext.liffe successfully introduced futures on the
Eurodollar in March 2004, with an opening monthly volume of
64 036. By June, monthly volume had reached 351 252 contracts.
The Boston Options Exchange began trading in February. Volume
grew from 241 319 contracts in the first month to 1.4 million con-
tracts in June. By June, the exchange’s market share had grown to
1.8 per cent of the US options trading volume.
The following excerpts from an article by Will Acworth editor of
Futures Industry magazine published by the FIA in the Sep./Oct. 2004
edition (the whole article can be found on www.futuresindustry.org)
illustrate what has been happening in the options markets over the last
few years.
10 Clearing and settlement of derivatives
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