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Derivative Exchanges

Derivative Exchanges by Contracts - 2019

By Michael J Defosse - November 28, 2019

What is a Derivative?

A derivative is a contract between parties where its value is based upon an underlying asset or group of assets. Common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. The derivative contract creates a financial security that is used for speculation or as a hedge.

There are typically four types of derivative contracts, which are futures, forwards, options and swaps. A futures contract allows parties to buy or sell an underlying asset at a certain date in the future at a specified price whereas a forwards contract allows parties to buy or sell underlying assets at a specified date at an agreed rate in the future. An option contract gives a party the right but not the obligation to buy or sell the underlying assets whereas a swap is a contract made between parties to exchange cash flows in the future.

Overview of the Top 20 Derivative Exchanges

While there are many derivative exchanges in the world, many are small and have limited trading so our research has focused upon ranking the 20 largest derivative exchanges by contracts traded.

In our analysis of the top derivative exchanges, we looked at their contracts traded during 2018. For more detailed information on each derivative exchange, follow their highlighted link.

  • 1. CME Group

  • Location: United States

    Contracts: $4.845 trillion

  • 2. National Stock Exchange of India

  • Location: India

    Contracts: $3.790 trillion

  • 3. B3 - Brasil Bolsa Balcao

  • Location: Brazil

    Contracts: $2.574 trillion

  • 4. Intercontinental Exchange

  • Location: United States

    Contracts: $2.474 trillion

  • 5. CBOE Holdings

  • Location: United States

    Contracts: $2.051 trillion

  • 6. Eurex Exchange

  • Location: Germany

    Contracts: $1.952 trillion

  • 7. NASDAQ

  • Location: United States

    Contracts: $1.895 trillion

  • 8. Moscow Exchange

  • Location: Russia

    Contracts: $1.500 trillion

  • 9. Korea Exchange

  • Location: South Korea

    Contracts: $1.408 trillion

  • 10. Shanghai Futures Exchange

  • Location: China

    Contracts: $1.202 trillion

  • 11. BSE Limited

  • Location: India

    Contracts: $1.033 trillion

  • 12. Dalian Commodity Exchange

  • Location: China

    Contracts: $982 million

  • 13. Zhengzhou Commodity Exchange

  • Location: China

    Contracts: $818 million

  • 14. Hong Kong Exchanges and Clearing

  • Location: China

    Contracts: $681 million

  • 15. Miami International Holdings

  • Location: United States

    Contracts: $421 million

  • 16. Japan Exchange Group

  • Location: Japan

    Contracts: $388 million

  • 17. Taiwan Futures Exchange

  • Location: China

    Contracts: $308 billion

  • 18. Australian Securities Exchange (ASX)

  • Location: Australia

    Contracts: $248 billion

  • 19. Borsa Istanbul

  • Location: Turkey

    Contracts: $236 billion

  • 20. Multi Commodity Exchange of India

  • Location: India

    Contracts: $230 billion

Source Data: WFE 2018 IOMA Derivatives Report

History of Derivative Exchanges

The first recorded example of a derivative transaction dates back to around 600 BC when Greek philosopher, Thales of Miletus, become the world’s first oil derivatives trader. After a series of poor olive harvests, Thales used his knowledge of astronomy to predict a strong season. He negotiated the delivery of olive oil presses for the spring knowing that there would be rising prices in olive oil.

In Medieval Europe, "fair letters" were used to buy and sell agricultural commodities. Merchants sold their merchandise at regional fairs with buyers using letters of credit, which could be settled by moneychangers. As a result, the Champagne fairs in northeastern France evolved into international clearinghouses for credit.

As trade moved toward coastal regions, which were closer to major trade routes, areas of trade were developed. In 1515, a bourse opened in Antwerp so traders could do their business. By this time, traders were no longer purchasing commodities directly. Instead, they were using forward contracts. For the next two hundred years, forward contracts were the main way that commodities were traded.

In Japan, during the 18th century, there was a major breakthrough. The first secondary market for commodity derivatives was created when actively-traded and transferable rice vouchers were settled for cash. Like today, transactions in feudal Japan were executed through a clearinghouse, which acted as an intermediary and guaranteed payment. It is for this reason that the Dojima Rice Exchange is considered to be the first modern futures market.

In 1848, the Chicago Board of Trade (CBOT) was founded to create an orderly process of trade in the United States and in 1865, standardized agreements and regulations were introduced by CBOT, making the market more efficient. This also helped to reduce transaction costs. As a result, speculators moved in, seeking to profit from fluctuating asset prices. This provided a huge increase in liquidity. In the 20th century, the Chicago exchanges became the home to trading in a variety of product types, ranging from agricultural commodities to metals.

Importance of Derivative Exchanges

The primary function of a derivatives exchange is to facilitate the transfer of risk among parties by offering mechanisms for liquidity and price discovery but it can also improve the allocation of resources, maintain efficient pricing and information flows, and act as a conduit for the transfer of risk within a country or across countries.

  • Wall Street Journal
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  • Bloomberg
  • Nikkei Asian Review
  • Reuters