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FIA Annual Volume Survey: Commodity and Interest Rate Markets Push Trading Higher in 2013

FIA Annual Volume Survey: Commodity and Interest Rate Markets Push Trading Higher in 2013

1 March 2014 9:00pm EST

The last time we looked at the annual volume data, the numbers were stunningly negative. In 2012, the total number of futures and options traded globally fell by 15.3%, the biggest annual decline in more than a decade. What’s worse, the downward trend was nearly universal. Volume declined in all the major regions—North America, Europe and Asia—and in nearly all categories of product. There was bad news nearly everywhere we looked.

This year the good news is that the trend line is not still pointing down. The bad news is that it didn’t really bounce back. Total volume rose by just 2.1% in 2013, only a slight improvement on 2012 and still well below the levels we saw in 2011 and 2010. 
Nevertheless, the cycle may be turning. There are still many sectors of the global futures and options industry where trading continues to be relatively dormant. But there are other sectors where benchmark contracts are coming back to life after years of depressed activity. 
For example, last year we saw a resurgence in the trading of interest rate futures and options, particularly in North America. The effects of the credit crisis five years ago have not completely melted away, but it appears that the interest rate complex is entering a new phase of growth. 
There are also a number of new contracts that are shooting upward. Silver futures exploded in popularity at the Shanghai Futures Exchange, with more than 173 million contracts traded in 2013. Currency futures trading took off at the Moscow Exchange, the United Stock Exchange of India, and several other exchanges around the world. And thermal coal futures were introduced with great success at China’s Zhengzhou Commodity Exchange. 

In line with this theme we have added a new chart to this year’s volume survey. After the usual list of the top twenty contracts in each asset class by total volume, we have added a list of the contracts that had the fastest rate of growth over the last five years. While many of these contracts are relatively small in terms of their absolute volume, they have the potential to drive the next generation of growth in this industry.

Global Trends 

By region, North America led the way with a 9.9% increase in volume, driven mainly by increased trading of interest rate futures and options at CME Group and the “futurization” of energy swaps at IntercontinentalExchange. In contrast, volumes in Asia, Europe and Latin America were all down on the previous year. North American exchanges now account for 36.7% of the global exchange-traded derivatives market, a larger share than any other region of the world. 

By asset class, the interest rate, energy and metals sectors all benefited from double digit increases in volume compared to the previous year. On the other hand, the equity index sector declined by 11.2%, primarily due to a huge decline in the trading of Kospi 200 index options. In 2012, more than 1.58 billion Kospi options changed hands at the Korea Exchange, more than any other listed derivatives contract in the world. In 2013, only 580.46 million Kospi options were traded, a decline of roughly two-thirds. 

This is the second year in a row that Kospi options have suffered from a dramatic decrease in volume. This is largely due to a deliberate campaign by the Korean authorities to discourage retail speculation in various types of equity derivatives. In particular, the size of the Kospi options was multiplied by five times, which means that one contract now provides the same exposure to the Kospi stock index that five contracts used to provide. 

While this is not the first time that an exchange has changed contract specifications, the enormous amount of volume in the Kospi options contract gives it a disproportionate impact on global volume trends. If we exclude this one contract from the data, total worldwide volume rose by 7.4% rather than 2.1%. If we look at just Asia, the effect is even more pronounced. Rather than falling 3.1%, trading volume in Asia actually rose 12.8% if the Kospi contract is excluded. 

So getting past the technical effects of Kospi, what were the main industry-wide trends in 2013? First, as mentioned above, there was a resurgence of interest rate trading in North America. Interest rate futures volume at U.S. exchanges jumped to 1.21 billion, up 19.6% from the previous year, while interest rate options at U.S. exchanges jumped to 285.92 million, up 25.5% from the previous year. The growth trend was especially strong in Treasury futures and options, with several contracts hitting all-time records for the volume of trading. 

Second, in the Asia-Pacific region, there was rapid growth in the trading of equity index futures and options in almost every part of the region and in particular Japan and China. This trend tended to have an “echo” effect outside the home market. For example, the surge of interest in the Japanese stock market affected trading in equity derivatives not only in Osaka but also in Singapore and Chicago. 

Third, the commodity futures market in China continued to grow by leaps and bounds. It has been obvious for some time that the exchanges in Dalian, Shanghai and Zhengzhou rank among the largest commodity exchanges in the world. The difference this year is that the market is now significantly broader than it used to be. The Chinese authorities have allowed the exchanges to introduce new types of futures, and some of these contracts—notably futures on coking coal, iron ore and flat glass—have been extremely successful. While much of the trading on China’s commodity exchanges continues to be speculative in nature, open interest is rising rapidly, an indication that there is greater commercial interest in holding these contracts over time as a hedge against price volatility. 

This year was also notable for a wave of mergers and acquisitions that transformed our list of the top 30 exchanges. IntercontinentalExchange’s acquisition of NYSE Euronext, which was completed in December, means that ICE is now the second largest derivatives exchange in the world by total volume, ahead of Eurex and behind CME Group. Moscow Exchange, which was created through the combination of Micex and RTS, is now the eighth largest derivatives exchange in the world, slightly behind Nasdaq OMX and just ahead of Korea Exchange. Japan Exchange, which brings together the Osaka Securities Exchange and the Tokyo Stock Exchange, is now the 14th largest derivatives exchange in the world. Right below it in 15th place is Hong Kong Exchanges & Clearing, which now includes the London Metal Exchange. 

A note on the source of the data. This year’s volume statistics were gathered from 84 exchanges that provide data to FIA on a voluntary basis. The statistics are based on the number of contracts that are traded on exchanges or cleared by a central counterparty on behalf of an exchange. The statistics do not include interest rate swaps or other over-the-counter products that are traded bilaterally and then brought into clearing, but they do include energy swaps that have been converted into futures—a process referred to as “futurization.” 

Prior to October 2012, ICE did not report volume for a large number of energy swaps that were traded as OTC products. On Oct. 15, however, most of these contracts were “futurized” and the exchange began reporting volume in these contracts alongside the pre-existing futures and options. This boosted ICE’s reported volume for energy futures and options in 2013, since 2012’s volume only included two and a half months of trading activity.  

Fixed Income: Resurgence in North America 

For exchanges in North America, the big change from 2012 was a revival of trading in interest rate futures and options driven mainly by changes in the outlook for interest rates. This was particularly evident in the Treasury futures and options complex at the Chicago Board of Trade subsidiary of CME. 

The 10 year Treasury note futures contract, the flagship of the complex, had a near-record year, with total volume of 325.93 million contracts. That was up 23% from 2012 and only 6.7% below the peak set in 2007, just before the credit crisis hit the financial sector. Five-year Treasury note futures, the second most active contract in the complex, reached 175.33 million contracts traded in 2013, up 31.5% on the previous year and an all-time record in volume. 

Options on Treasury futures grew even more rapidly. After hovering around the same level for the last several years, volume in the 10 year Treasury note options surged in 2013 to a record 90.4 million contracts, up 61.2% from 2012. Volume in the 5-year Treasury note options jumped to 24.34 million, up 136.5% from the previous year. 

Trading at the short-end of the curve was not quite so robust. The trading of Eurodollar futures, reached 517.25 million contracts. That was up 21.3% from 2012 but down 8.3% from 2011 and down 13.4% from 2008. 

Mid-curve options surged in popularity, but not enough to offset a long-term decline in the trading of the conventional Eurodollar options. On a combined basis, the volume in Eurodollar options reached 149.98 million in 2013, up 7.5% on the previous year but down 34.3% from 2008. 
Across the Atlantic, a somewhat different trend is playing out. There has been a resurgence in the trading of short-term interest rate futures at Liffe, but the long-term contracts at Eurex remain well below the pre-crisis peak. 

Volume in Euribor futures, the benchmark short-term interest rate futures contract in Europe, jumped 33.4% to 238.49 million contracts in 2013. That did not quite reach the peak level of activity set in 2011, but it brought volume in this contract back above the level set in 2008. 
Activity in mid-curve options on Euribor futures exploded in 2013, with volume in the one-year, two-year, and three-year midcurve options tripling to 67.58 million. On the other hand, conventional Euribor options continued to decline in popularity, with volume now less than half of what it was a few years ago. On a combined basis, options on Euribor futures reached 118.47 million in 2013, up 27.8% on the previous year. As with Euribor futures, trading activity is now back to roughly the same level as 2008 but below the peak set in 2011. 

The bund futures contract at Eurex, the benchmark government bond interest rate futures contract in Europe, had a slight increase in trading, up 3.2% to 190.30 million, but volume in this contract remains 26.2% below 2008. Trading in bobl futures at Eurex rose 20.3% to 129.53 million, but volume in this contract is also well below 2008’s level.

On the other hand, Eurex has had great success with the introduction of futures on other sovereign debt. The BTP futures, which are based on Italian debt, have risen steadily since they were introduced in 2009 and reached 9.29 million contracts in 2013. The OAT futures, which are based on French debt, were launched in April 2012 and traded 11.73 million contracts in 2013.

Looking beyond Europe and North America, Australia’s ASX 24 had another year of solid growth in its interest rate contracts. The exchange’s three-year Treasury bond futures increased 11.3% to 48.98 million contracts traded in 2013 and its 10 year Treasury bond futures rose 29.6% to 23.93 million contracts. Volume in both contracts is up by more than 80% since 2008, and the threeyear contract is now the most actively traded futures on government debt in the world outside the Chicago Board of Trade and Eurex.

Also worth noting is the steady growth in the short-term interbank interest rate futures at Brazil’s BM&FBovespa. Volume in this contract reached 394.06 million in 2013, making it the second most actively traded interest rate contract in the world. While last year’s growth in volume was a relatively modest 15.6%, that comes on the heels of several years of similar increases, and today the volume in this contract is more than twice as large as 2008.

Equity Index Sector: Strong Growth in Asia

One of the more interesting trends of the year was the surge in the volume of equity derivatives based on Asian stock indices. For example, greater investor interest in the Japanese stock market led to much heavier trading in futures and options based on the Nikkei 225, the leading index of Japanese stocks.

At the Osaka Securities Exchange, trading in the regular size Nikkei 225 futures and the mini Nikkei 225 futures rose 58.3% and 79.3% to 30.91 million and 233.86 million contracts, respectively. At the Singapore Exchange, Nikkei 225 futures rose 39.6% to 39.09 million contracts. At CME, the yen-denominated Nikkei 225 jumped 105.1% to 11.79 million and the dollar-denominated Nikkei 225 futures jumped 176.9% to 4.68 million contracts.

There was also a large increase in the trading of options on the Nikkei 225 index. Trading in this contract rose 17.4% to 57.27 million on the Osaka exchange and 131.8% to 10.18 million contracts at SGX.

There was also a large increase in the trading of equity index futures at the China Financial Futures Exchange in Shanghai. Since this exchange began offering futures based on the CSI 300 stock index in 2010, this contract has been growing steadily. Volume in 2013 reached 193.2 million, up 83.9% from the previous year. In fact, the CSI 300 is now the tenth most active equity index contract in the world.

It is worth noting that the contract’s index multiplier is 300 yuan. At current exchange rates, that is equivalent to $50, which is the same as the index multiplier for the E-mini S&P 500 futures traded at CME. This is a relatively large contract size for Asian derivatives exchanges, and it reflects the desire of the Chinese authorities to encourage the use of this contract by institutional investors rather than retail traders.

Access to this market is difficult from outside China, and many offshore traders have turned instead to the FTSE China A50 index futures traded at SGX. Volume in this contract more than doubled in 2013 to 21.91 million contracts, making it one of the fastest growing equity index contracts in the world.

Commodity Futures: Explosive Growth in China

China’s commodity futures markets have been growing extremely rapidly in recent years, but 2013 stands out for the large number of new contracts that entered the markets. The authorities permitted the launch of futures on an array of commodities, some of which have never been listed before on any other exchange. The list includes bitumen, block board, fiber board, eggs, iron ore, coking coal and thermal coal. The most actively traded of this group was coking coal, which was listed on the Dalian Commodity Exchange in March 2013 and traded 34.26 million contracts by year end.

There was also strong growth in an earlier wave of new contracts introduced in 2012. These include futures on rapeseed, known as canola in the U.S., rapeseed oil, rapeseed meal, flat glass, and silver. Flat glass futures was the most actively traded of this group, reaching 16.14 million contracts traded in 2012 and 186.12 million in 2013.

The single most active contract in China was once again the steel rebar futures, which hit a record of 293.73 million contracts traded on the Shanghai Futures Exchange. This contract, which was launched in April 2009, has emerged as the world’s leading futures on steel, and reflects the emergence of commodity futures markets in China as key barometers for economic growth.

China also is seeing explosive growth in futures on precious metals. Silver futures, which were listed on the SHFE in May 2012, traded 21.26 million contracts in its first year, then jumped to 173.22 million in 2013. Gold futures also took off in 2013, jumping from 5.92 million contracts in 20.09 million. Part of the reason for the jump in gold futures trading was the introduction of night trading in July 2013, which allowed domestic investors to trade gold during the hours when the London and New York markets are open.

As a result of this wave of increased activity, the Chinese exchanges were among the fastest growing exchanges in the world in 2013. On a combined basis, China’s commodity futures exchanges traded 1.868 billion contracts in 2013, up 38.9% on the previous year.

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