Blue Group: Stefano Dal Cin Matteo Sostero Francesco Buoro. Ca Foscari Harvard Summer School 2010 Corporate Risk Management

Transcription

1 Blue Group: Stefano Dal Cin Matteo Sostero Francesco Buoro Ca Foscari Harvard Summer School 2010 Corporate Risk Management

2 Volumes of derivatives traded in European and American ODEs. Segmentation of derivatives in ODEs. Specialization of ODEs.

3 1990 Mar.1993 Dec.1993 Sep.1994 Jun.1995 Mar.1996 Dec.1996 Sep.1997 Jun.1998 Mar.1999 Dec.1999 Sep.2000 Jun.2001 Mar.2002 Dec.2002 Sep.2003 Jun.2004 Mar.2005 Dec.2005 Sep.2006 Jun.2007 Mar.2008 Dec.2008 Sep.2009 Notional amounts in billions of USD Volumes of derivatives traded American and European ODEs Notional Amounts All markets American market European market Source: BIS [1-2-3]

4 Segmentation of derivatives in ODEs N. of contracts Agricultural 5% Energy 4% Metals 3% Other 1% Currency 6% Interest Rate 14% Most exchanges list derivatives for very similar underlying products Often they specialize in a particular asset class [5] Source: WFE [4] Equity 67%

5 Specialization of ODEs Specialization attracts agents willing to trade in a particular asset class. Liquidity Efficiency Self-reinforcing trend and virtuous circle.

6 Specialization of ODEs Energy derivatives CME Group Historically, CME Group launched the world s first futures energy contracts [6] Heating oil (1978) Crude oil (1983) Today, as for energy derivatives, CME Group is the most liquid ODE 1.25 mln energy contracts every day [6] 265 mln energy futures every year [6]

7 Specialization of ODEs Energy derivatives CME Group Energy Derivatives Light, Sweet Crude Oil Futures CME 137,428,494 Brent CrudeOilFutures ICE Europe 74,137,750 Natural Gas Futures CME 47,951,353 WTI Crude Oil Futures ICE Europe 46,393,671 Gas Oil Futures, ICE Futures Europe ICE Europe 36,038,870 Crude Oil Options on Futures CME 28,551,730 Henry Hub Natural Gas Swap Futures CME 25,670,240 European Style Natural Gas Options CME 25,309,214 No. 2 Heating Oil Futures CME 21,426,015 U.S. Natural Gas Fund ETF Options USA 21,341,282 NY Harbor RBOB Gasoline Futures CME 21,159,516 U.S. Oil Fund ETF Options USA 15,932,407 Henry Hub Penultimate Swap Futures CME 11,038,692 Brent Oil Futures RTS (RU) 7,471,665 PJM WH Off Peak Day Ahead Swap Futures CME 6,810,613 ECX EUA Futures ECX (Europe) 3,775,621 miny Crude Oil Futures CME 3,368,983 Among the top 20 energy derivatives products, CME detains a 50.11% share Source: FIA [7]

8 Consolidation and efficiency of derivatives markets Derivatives usage in US, EU and Switzerland ODE vs. OTC for efficiency and innovation

9 Specialization and consolidation of exchanges Specialization and consolidation of exchanges has implications in terms of efficiency and completeness of markets. Consolidation of exchanges (in the last 10 years): CME Group (US) NYSE-Euronext (US/EU) Eurex (EU/CH/US) (US with EU subsidiary) CME NYSE Eurex CBOT Euronext ICE NYMEX Liffe ISE According to a 2008 report by Deutsche Börse [5]: Comparative advantage, economies of scale, automation and standardization have allowed to reduce overall transaction costs.

10 Derivatives usage Specialization of ODE markets stems also from different corporate hedging strategies. ISDA 2009 survey of World s 500 largest companies: 94% of them used derivatives in 2009 (up from 90% in 2003). Significant segmentation by industry as well as geography. Number of companies Global F500 Derivatives usage Types of derivatives used Interest rate Forex Commodity Credit Equity US ,8% 72,5% 77,8% 44,4% 17,6% 22,2% EU ,4% 97,6% 97,6% 57,1% 24,1% 36,5% CH % 100% 100% 50% 35,7% 71,4% Source: Adapted from 2009 ISDA survey [8]

11 Empirical research on derivatives usage A literature survey highlights recurring factors driving derivative usage : International trade and foreign currency exposure [9,10,11,12] Swiss, Dutch, Belgian and German firms are exposed to forex risk Firm size [13] ISDA and Wharton report focus on firms of different sizes Disclosure regulation, accounting and tax treatment [13, 10,11] Different regulation concerning derivative reporting shapes firms CRM Risk awareness [9] Swiss firms were unable to assess their forex risk profile Availability of alternatives [9, 10] contract specifications, sources of funding or industrial structure may replace derivatives Shareholder orientation framework [10, 13, 12] Different shareholder influence imply different focus on earnings vs cash flow protection Common trend: the literature (mainly produced in the period ) almost unanimously underlines underutilization of derivatives. Current evidence suggests an improvement on the issue.

12 Organized Derivatives Exchanges vs. Over The Counter exchanges ODE and OTC differ in terms of efficiency, completeness and innovation Standardized Not Standardized Cleared, regulated ODEs (e.g. CME, EUREX) Tailor-made clearing Not cleared, self-regulated International Currency and Swap markets Pure OTC derivative markets Source: Adapted from IMF working paper [14] ODEs OTCs Higher liquidity Tighter supervision Lower credit risk Higher flexibility customization of products tailoring of risk Faster innovation Transaction costs (for 1m of notional amount) 7 55 Source: Own research, Deutsche Börse report [5]

13 Francesco Buoro Innovation in derivatives markets

14 a. Product innovation and market growth b. Case: derivatives on carbon emissions allowances

15 derivatives market has been highly innovative Product innovation is a critical driver of overall market growth Two important examples: CDSs, derivatives on carbon emission allowances CDSs: notional amount outstanding from 135 billion (1996) to about 50 trillion (June 2010) (BIS [1,5]) Carbon emissions allowances: from 24 billion (2006) to 144 billion (2009) (World Bank[19])

16 Europe is * + the center for derivatives innovation. (City of New York/US Senate [23]) European players are especially renowned for their innovativeness. They constantly score high in user rankings. (Deutsche Börse Group [5]) Since the beginning of 2005 to the end of 2007 the top three derivatives exchanges (Eurex, CME and Euronext.Liffe) have introduced more than 800 new products, increasing the number of total products available to users by more than 80 percent. (FIA [5])

17 Derivatives on carbon emission allowances are one of the newer product innovations This kind of market is a consequence of the Kyoto Protocol It s a clear example of differences between Europe and US It can reach the value of $2 trillion (US Commodities Futures Trading Commission Morningstar [15])

18 Growth of the market- Carbon emission allowances (million of dollars) EU S 2003/87 Directive has been the starting point for exchanges [16, 22] $ 160 $ 140 $ 120 Cap and trade system $ 100 $ 80 $ 60 $ 40 $ 20 $ Global value of the market Carbon emission allowances are useful to offset excesses in emissions (World Bank [17-19]) or to gain money by reducing emissions and selling rights to the exchange.

19 80% of players are European (The Economist [21]) Market shares (2009) - $ value Chicago Climate Exchange 0,20% Others (mainly New South Wales) 0,82% EU ETS 98,98% (World Bank [18]) Invented in US First Exchange created in US in CME (2003)

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21 References *1+ Bank for International Settlements data, Statistics on exchange traded derivatives. Basel, Switzerland. *2+ Bank for International Settlements (2010). BIS Quarterly Review, June International banking and financial market developments. Basel, Switzerland. *3+ Bank for International Settlements (2010). BIS Quarterly Review, June Statistical annex. Basel, Switzerland. *4+ World Federation of Exchanges (2010). Annual report and statistics. [5] Deutsche Börse AG (2008), The Global Derivatives Market - An Introduction, White Paper, Frankfurt am Main Germany. *6+ CME Group (2009). Energy products. Chicago, Illinois: CME Group. [7] Futures Industry Association data. *8+ International Swaps and Derivatives Association (2009), Derivatives Usage Survey [9] C. Loderer and K. Pichler (2000). Firms, do you know your currency risk exposure? Survey results. Journal of Empirical Finance, 7(3-4): [10] G.M. Bodnar, A. De Jong, and V. Macrae (2003). The impact of institutional differences on derivatives usage: a comparative study of US and Dutch firms. European Financial Management, 9(3): , 2003.

22 References (continued) [11] M.J.K. De Ceuster, E. Durinck, E. Laveren, and J. Lodewyckx (2000). A survey into the use of derivatives by large non-financial firms operating in Belgium. European Financial Management, 6(3): [12] G.M. Bodnar and G. Gebhardt (1999). Derivatives usage in risk management by US and German non-financial firms: A comparative survey. Journal of International Financial Management & Accounting, 10(3): , [13] G.M. Bodnar, G.S. Hayt, R.C. Marston, and C.W. Smithson (1995). Wharton survey of derivatives usage by US non-financial firms. Financial Management, 24(2): [14] J. Nystedt (2004). Derivative market competition: OTC market versus organized derivative exchanges. International Monetary Fund. [15] Morningstar.it (2010), Guadagnare con lo smog. [16] Laura Monni (2006), The European system of Emission Trading (EU-ETS). *17+ World Bank (2008), World Bank Releases 2008 State and Trends of the Carbon Market Report. *18+ World Bank (2009), World Bank Releases 2009 State and Trends of the Carbon Market Report. *19+ World Bank (2010), World Bank Releases 2010 State and Trends of the Carbon Market Report. *20+ Come investire oggi (2010), Credit Default Swaps: funzionamento e rischi. [21] Matteo Razzanelli (2007), Economist: W il mercato del carbonio!. *22+ Kyoto Target (2010), Carbon Markets. *23+ City of New York/US Senate (2006), Sustaining New York s and the US s global financial services leadership