First quarter derivatives trading volumes reveal reduced activity, IPD says (UK)

The total volume of IPD Index Property Derivatives traded over the first quarter of 2009 were the lowest first quarter figures for three years, at just £606 million, according to data released on May 1 by IPD.

Since the rapid growth of derivatives trading from 2007, first quarter volumes have proved the year's most active period – in Q1 2008, trading volumes were £3.7 billion, while over the same period a year earlier £3.3 billion worth of property derivatives were executed. This annual spike in first quarter activity is due in part to the preference of full calendar year pricing among traders.

This year, a total of 156 trades were executed over Q1, while the average outstanding deal size fell to £8 million, from £9 million in the fourth quarter of 2008. In the UK, significantly still the most mature property derivatives market, the total notional value of deals completed stood at £554 million, compared to £979 million last quarter and £3.4 billion over the same period last year.

The French and German derivatives markets both saw significant falls in trading volumes compared to both the previous quarter and Q1 last year. There were just seven French trades worth £51 million and one German trade. Annual trading volumes for France were £319 million in 56 trades, while Germany recorded £143 million in 34 trades.

The aggregate total value of trades executed on the IPD suite of indices since recording began in Q4 2004 now stands at £22 billion, over 2105 trades. The outstanding notional amount is now £9.4 billion.

Ian Cullen, co-founding Director of IPD and Head of Systems and Information Standards, said: "The trading volumes in the OTC market were well down against those of the first quarters of 07 and 08. However in a time of unprecedented property market turmoil, there were some small but interesting signs of the use of new approaches to the toolkit of risk management – the first 40 trades of Eurex property futures and some cautious property fund re-entry to the market using structured products."

Nick Scarles, Chairman of the IPF Property Derivatives Interest Group and Group Finance Director, Grosvenor, said: "With Lehmans exiting the market and several other banks cutting back on new business activities, it was inevitable that the total volume of trades was going to fall in this quarter, particularly in the inter-bank market. For end users, the number of UK trades is an equally important factor. In the quarter the number of such trades fell marginally to 148 (versus 156 Q4 2008), reflecting smaller lot sizes. So, while there are fewer deals between banks, for end users seeking to transact at or below the £10m level, there remains good liquidity to enable efficient deal execution and reliable post deal valuation".

Source: IPD

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