A study of the Swedish derivative market
News, Staff memo The derivative market is large, both in Sweden and globally. In Sweden, the derivative market is 16 times the size of GDP, or 5 times the size of the Swedish banking sector's total assets. At the same time, the Swedish market only amounts to just over one per cent of the EU’s derivative market. In this Staff memo, the authors describe the Swedish derivative market with the aid of data for all outstanding derivative contracts entered into by Swedish participants. Given the size of the market and the interconnectedness derivative contracts create between participants, it is important from a financial stability perspective to better understand the market and the risks the contracts may entail.
The fact that Sweden is a small, open economy is reflected in the derivative market, as the Swedish derivative market is closely interconnected with the foreign ones. This is clear in that many derivative contracts are denominated in foreign currencies and the counterparties are often localised abroad.
The Swedish derivative market also shares many properties with the larger derivative market for the EU countries. This includes the fact that both derivative markets are dominated by interest rate derivatives, that a large majority of the derivative contracts are traded bilaterally instead of on an exchange, and that a small number of participants are responsible for the majority of the outstanding derivative contracts.
Understanding how derivative contracts are used is important to better understand the risks they may bring into the financial system, not least because derivatives are often reported as off-balance-sheet items, in notes.
This study is based on comprehensive data on Swedish derivative contracts. To increase transparency on the derivative markets, starting a few years ago, all derivative contracts in the EU are reported to trade repositories. The Riksbank has access to these. This enables the Riksbank to obtain information on the entire Swedish derivative market in a way that was not previously possible. The report uses data from the repositories to illustrate different aspects of the Swedish derivative market. This is done by using different data breakdowns to illustrate different types of characteristics, such as which derivatives contracts are common and in which country the counterparties are located.
The Staff memo was written by Mats Levander, Carl-Johan Rosenvinge and Vanessa Sternbeck Fryxell, who all work in the Riksbank’s Financial Stability Department.
A Staff Memo is a publication where employees of the Riksbank can publish qualified analyses in relevant subject areas. It is a publication for civil servants that is free of policy conclusions and individual standpoints on current policy issues.