Exchange-traded derivatives are products listed for trading on public exchanges and consist mostly of options and futures contracts, compared to OTC derivatives like credit-default swaps that are traded privately. The derivatives exchange acts as an intermediary to all transactions and acts as a guarantor, using pooled initial margin from both sides of the trade. Exchange-traded derivatives reduce counter party risk in contrast to OTC derivatives where one party depends on the other party to fulfill its obligation. Exchange-traded derivatives typically have standard contract specifications and exchanges make pricing available on a real time basis promoting transparency. In contrast, OTC derivatives are tailored to meet the needs of each party and lack transparency.
The world's top three derivatives exchanges are the Korea Exchange, Eurex, and CME Group. The BM&F, Nasdaq OMX PHLX, and the Chicago Board of Options Exchange were the largest equity option exchanges.
In 2008, U.S. exchange operator NYSE Euronext formed an alliance with Dalian Commodity Exchange (DCE) to share information and resources with the aim of expanding their combined global reach. DCE is China's largest futures exchange by trading volume while NYSE Euronext is the world's largest exchange group by market capitalization.
Following the recent global credit crisis, investors are now clamoring for previously OTC derivatives trading to move to regulated public trading spheres to create more transparency in the market. They are demanding that central exchanges and clearinghouses be provided specially to trade products like interest rate swaps that had previously been bought and sold privately through investment banks and other financiers.
Volume and regional trends
Based on data from the Futures Industry Association (FIA), combined futures and options volume across 81 global exchanges rose 11.4 percent in 2011 to 24,972,402,568 contracts. Volume growth was reported up 60.9 percent in the five years to 2011. Trade volume growth has been paced by activity in Brazil, China, India, and Russia.
Based on product type, equity indices and individual equities posted the greatest volumes in 2011 and accounted for 33.9 percent and 28.3 percent of total volume respectively. Interest products were the next most traded category with a 14.0 percent share.
By region, 39.3 percent of exchange-traded volume occurred in the Asia Pacific followed by 32.8 percent in North America. Europe was the next largest region with 20.1 percent of trading activity.