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Why OTC Derivatives Open Interest Can Exceed Comparable ETD Risk

Article Quant Q&A · Author: presure
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Summary

The document questions whether worldwide exchange-traded derivative (ETD) open interest is close in scale to over-the-counter (OTC) derivative notional. It cites reported contract counts and notional estimates for OTC derivatives, commodity derivatives, and selected ETD categories, then explains why those figures cannot be compared directly. The central point is that open interest can reflect contract conventions and netting rules as much as the amount of market risk participants retain.

Exchange-traded contracts are standardized, so offsetting trades in the same contract can reduce open interest. OTC transactions often differ in dates, rates, or other terms, preventing exact netting even when opposing positions largely offset economic exposure. As a result, OTC open interest may be grossed up. The example contrasts an offsetting futures position with swaps whose distinct terms leave separate reported trades. The explanation is qualitative; the cited totals use different measures and coverage, so the document does not establish a like-for-like market-size comparison.

Key ideas

  • ETD contract counts and OTC notional amounts are different measures and should not be compared at face value.
  • Standardized futures positions can be netted when opposing trades use the same contract.
  • OTC trades with differing terms may remain separately counted despite offsetting much of their economic risk.
  • Gross open interest does not directly measure the market risk participants carry.
  • Coverage and measurement differences limit conclusions about relative ETD and OTC market size.

Tags

FuturesDerivatives pricingMarket microstructureRisk management
Full text
# Notional Value of Worldwide ETD vs OTC Open Interest


# Notional Value of Worldwide ETD vs OTC Open Interest












I request assistance to find the Notional Value of Worldwide Open Interest of Exchange Traded Derivatives (ETD). As per this FIA link, the total open interest at the end of April 2024 was 1.33 billion contracts.

I seek to compare this data with Notional Value of Worldwide Open Interest of Over the counter (OTC) Derivatives. As per data from BIS, the Notional Value of all OTC derivatives stands at 667 trillion USD.

This WFE link suggests that commodity derivatives alone have a Notional Value of about 200 trillion USD.

This BIS link suggests that the notional value of interest rate and FX based ETD is around 87 billion USD. The BIS does not compile XTD statistics for equity, commodity or credit derivatives contracts, or for derivatives that reference non-standard underlying instruments (eg inflation, weather or energy contracts).

It is usually mentioned that OTC markets are several orders of magnitudes larger than Exchange Traded markets. However, it seems that ETD and OTC markets are not very different.

It would be great if someone can help me check if what I see is correct.

## Answer by LongTimeLurker (score 1)

https://quant.stackexchange.com/a/79629

Just a comment. You have to be very careful when you compare open interest in ETD vs OTC markets.

Even though open interest in OTC markets tends to be much higher than in ETD, it isn't necessarily a reflection of market participants carrying more "risk" in OTC vs ETD.

Simple example: ETD are standardized contracts and there are only so many of them. If I buy 3 month SOFR future, the open interest increases by one lot. If I the next day sell the same SOFR future, the open interest decreases one lot, and I have a zero open interest position.

Consider the same dynamic in the OTC markets. Today I receive on a 10Y swap on some notional amount. My open interest increases by some number. Next day I pay on a 10Y swap to offset the risk.

From a risk perspective, there is close to zero risk in this position, but because the contract specs are different: One day different settlement date, likely a different rate etc. The contracts don't net, and the open interest grosses up.

So to sum it up: Open interest in OTC grosses up because you can only net trades when every single trade characteristic matches. in ETD the contract specs always match by design because they are standardized.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.