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Rapid growth in Irish use of derivatives resumes Back  
After a slow-down in the use of derivatives during 2002/2003, volumes in the Irish market have almost crept up to levels associated with the introduction of the euro in 1999, with the latest figures showing that the market grew by 38 per cent from March 2003 to March 2004.
TThe euro was responsible for a large proportion of the growth over the period 2000-2001, when annual growth was in the region of 50-70 per cent, as the euro was introduced into Europe’s capital markets on January 1st, 1999. John Moclair, head of domestic sales at BOI Global Markets, says that this has been a key factor in driving the growth in the use of derivatives, as prior to the advent of the euro, derivatives could not be structured in Irish pounds, due to the illiquidity of the currency.

Factors driving the growth over the recent past include continued volatility on the interest- rate and currencies front. For example, in April of this year, there was intense speculation regarding a further rate cut, and Conor Dooley, a risk analyst at AIB Treasury & International, says that, ‘the speculation and hedging ahead of this potential rate cut was was intense, and led to significant volume increase in the Eonia swap market, the IRS market and the euro interest rate futures and options markets’.

Moreover, there is now a greater demand for derivatives, with the global growth of hedge funds contributing to the growth. Also, the increasing sophistication of corporates is a factor. Moclair says that corporates have become increasingly sophisticated, due in part to the increasing number and variety of training courses on offer.

Corporates use derivatives for risk minimisation, Moclair says, with currency (€/? and €/$) and interest rate swaps/FRAs being the most common type of products used. Occasionally corporates will enter into large currency swaps over a 10/20-year period. This was seen a lot last year when many corporates, including Bord Gais and Kerry Group, participated in private placement deals in the US.

With respect to interest rate derivatives, Conor Dooley, a risk analyst at AIB Treasury & International, says that future growth is envisaged to come from the corporate sector. He says that significant interest rate risk reduction is a compelling reason for corporates to initiate interest derivative strategies, adding that, ‘Greater awareness, knowledge and confidence in the derivative market, combined with cost effectiveness and advances in technological trading applications make derivatives more accessible to corporates’.

IFSC banks are big users of derivatives and have also contributed to this growth. John O’Farrell, head of treasury at UniCredito Italiano Bank (Ireland) plc, says that the Dublin based bank has been using derivatives since the bank’s inception in 1997, but that there has been a significant increase in usage over the past three years. This is due to the use of derivatives in balance sheet growth and risk management strategies he says. The bank uses derivatives primarily for hedging purposes, but also to take positions, and the most common type of derivative product used are overnight indexed swaps (Eonia Swaps), which are short-term interest rate swaps, with one fixed side and the other side using a reference rate (Euro Over-Night Indexed Average rate) compounded daily and settled at maturity.

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