Of the $47.5 trillion in OTC notional values, 61 percent was in interest rate instruments, -and 37 percent was in foreign exchange instruments, including outright forwards and swaps. Outstanding equity contracts amounted to 1.25 percent and commodity-related instruments were 3/4 percent of the overall notional value or about $590 billion and $350 billion, respectively. Exchange-traded contracts outstanding amounted to $8 trillion, almost all of which were interest rate contracts. Gross market values or replacement costs were $2.2 trillion for OTC contracts, about 4.6 percent of the notional value.
Of the interest rate products, 50 percent was cross-border; while 56 percent of foreign exchange products was cross-border, for an overall total of about $26 trillion. For equity products, cross-border position data are not reported by the BIS. For comparison, the total stock of domestic and international securities in the OECD countries was $26.3 trillion, and international banking assets excluding securities holdings were $8.3 trillion in March 1995.
Thus, if applied one-to-one to outstanding securities, the stock of both OTC and exchange traded derivatives were sufficient to have repackaged the risk characteristics of all domestic and international securities and all international banking assets. Of the outstanding volume of OTC -products, however, about 57 percent of the local and cross-border deals was between dealers to balance positions.
Why Derivatives Can Increase Cross-Border Movement of Capital
It is worthwhile at this point to consider a brief set of examples of derivative products. These examples will be used throughout the remainder of the paper to show how derivatives might aid in the diversification of portfolios, reduce or to enhance risk, evade prudential regulations, and avoid capital controls and taxes. In these activities, they can create gross international capital flows that otherwise might not have materialized, but they also can confound the nature of the cross-border flows that do occur.
Some of the derivative types in the following examples were important in the Mexican exchange rate crisis of 1994-1995, so they will be developed in the Mexican context, which is used as a backdrop for many of the succeeding conclusions; but they are generic products and are used world-wide for the same reasons they were used in Mexico.