Global Derivatives Activity Down, Suggests Greenwich Survey

The average institution's derivatives volume trading declined slightly in 2002, from $3 billion (all values are in U.S. dollars) to $2.9 billion. Or so says a Greenwich Associates survey published today. In the Americas, average volume rose slightly, from $2.8

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The average institution’s derivatives volume trading declined slightly in 2002, from $3 billion (all values are in U.S. dollars) to $2.9 billion. Or so says a Greenwich Associates survey published today.

In the Americas, average volume rose slightly, from $2.8 billion to $2.9 billion, while in Europe it fell from $3.9 billion to $3.6 billion. In Asia-Pacific, average volume stayed level at just under $1 billion. Much corporate derivatives activity continues to be concentrated in swaps and almost one-half is driven by their need to manage their existing assets and liabilities.

Showing business to a dealer on a non-competitive basis continues to be a less prevalent practice in derivatives than in foreign exchange, despite a modest pickup over last year. Almost one-third of derivatives users, up from one-quarter in 2001, show at least some of their business to just one of their dealers. The proportion of derivatives that these companies traded non-competitively is essentially unchanged at 15%.

More than one half of larger derivatives users prefer sales coverage by a derivatives specialist, 31% prefer a generalist supported by a specialist, and just 15% prefer a generalist covering a range of projects. “However, many banks are moving to cover each customer by the whole range of products that customer may need – in most cases by integrating their sales teams for foreign exchange, derivatives, money markets and debt capital markets,” consultant Peter D’Amario says. “In some cases, they even have individual sales people covering a (smaller) corporate for more than one asset class”

Quite a few companies award more of their derivatives business to banks that have committed to support them with credit. However, not all companies do so and not all banks are benefiting equally from this practice.

Among larger corporations using derivatives, over 40% say they award business to banks on the basis of credit. This includes almost two-thirds of U.S. institutions and almost 60% of those in Australia/New Zealand and Canada, but only 40-45% in most Asian countries, below 30% in Japan, and less than that in many European countries.

“Credit is more important than ever, especially in the North American market,” Frank Feenstra says. “Loan commitments are helping dealers get on short lists and stay there.”

Compliance with internationally-mandated accounting standards requiring mark-to-market tracking of interest-rate derivatives value by those larger corporate that use them remains widely divergent across regions of the globe, with near-total uptake in some markets and well under half in others.

While the United States is at full compliance when it comes to U.S. Financial Accounting Standard 133, better known as FAS 133, its international equivalent, IAS 39, is less commonly practiced. While 89% of Japanese institutions tell Greenwich Associates they are in line with IAS 39, only 36% of continental European institutions say the same. FAS 133 became mandatory in June 2000, while IAS 39 will take effect in Europe in 2005.

The United Kingdom (44%) and Australia/New Zealand (32%) also have under half their institutions reporting compliance.

Greenwich Associates consultant Frank Feenstra points out that there is a willingness in some markets to do more to comply. “In Asia outside Japan, compliance levels rose from about 45% to 55%, with nearly 20% saying they will do the same soon,” he reports. “But in continental Europe, by contrast, just 14% beyond the 36% already compliant say they plan to be compliant soon.”

This despite the fact little negative impact on derivatives trading has been reported by those using FAS 133 or IAS 39. “Only 10% of institutions say the regulations have caused ‘significant’ reductions in their derivatives activity, and less than that report ‘modest’ reductions,” consultant Tim Sangston reports. “Four-fifths of those we talked to reported no change at all.”

Average total compensation for derivatives professionals rose globally in 2002, from $104,000 to $111,000. Salaries and bonuses both improved slightly from their 2001 levels.

The United States paid substantially better than other markets, increasing their average total compensation from $164,000 to $172,000. Professionals in Canada, the United Kingdom, and continental Europe are paid on average between $90,000 to $99,000 in total compensation.

From September to December, 2002, Greenwich Associates conducted 1,118 mostly in-person and some telephone interviews at corporations and institutions around the world about their interest-rate derivatives trading practices, service provider assessments, and compensation. Interviews were conducted with chief financial officers, finance directors, treasurers, assistant treasurers, fund managers, portfolio managers, and buy-side traders. Interviews were conducted in the following countries: Argentina, Austria, Australia, Belgium, Brazil, Canada, Chile, China/Hong Kong/Macao, Colombia, Denmark, Finland, France, Germany, India, Indonesia, Ireland, Italy, Japan, Malaysia, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Portugal, Singapore, South Korea, Spain, Sri Lanka, Sweden, Switzerland, Taiwan, Thailand, the United Kingdom, the United States, and Venezuela.

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