ISDA believes there is a misperception that only a small fraction of derivatives activity relates to hedging that benefits the “real economy.” ISDA has published an analysis that challenges this assumption. According to the analysis publicly available data published by the Bank for International Settlements reveals that 65% of over-the-counter interest rate derivatives market turnover involves an end user on one side and a reporting dealer on the other. These participants, comprising non-dealer financial institutions and non-financial customers, use derivatives primarily to hedge risks and reduce volatility on their balance sheets.
According to the analysis the remaining 35% of derivatives turnover activity relates to dealer market-making and the hedging of customer transactions. ISDA believes these transactions are vital for market liquidity and the facilitation of client trades. Without this, end users would be unable to put on risk-reducing and cost-effective hedges, potentially leading to less hedging and more balance-sheet volatility.
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