While economic fundamentals generally drive derivatives trading, this year market participants expect economics to take a back seat to the political environment.
According to a survey conducted in the first six weeks of the year by Crisil Coalition Greenwich, a consulting firm focused on the financial services industry, in partnership with FIA, an overwhelming majority of exchanges, brokers, trading firms and other participants in the global derivatives markets expect trading activity to rise in 2025. Only 16% expect trading volume to remain at roughly the same level as last year, and only a tiny fraction – 3% – expect a decline.
Four out of five survey respondents named political instability and geopolitical conflict as the most likely to generate growth in derivatives trading over the next two years, a ratio much higher than any other likely factor. In comparison, roughly half of the respondents identified changes in either interest rate policy or growth in retail participation as the top drivers, and only a quarter pointed to developments in Brazil, China and India.
Looking specifically at the US derivatives markets, the survey respondents flagged the threat of tariffs as a key factor. The survey asked which aspects of the Trump administration had the highest potential to boost trading activity. The implementation of tariffs ranked first, followed by the adoption of a more business-friendly approach to regulation.
Although the survey was conducted in the early days of the new US administration, the derivatives markets had already begun to anticipate the potential impact of its policies on the markets, which may help explain why these two factors ranked so highly. The threat of tariffs, which President Donald Trump forecasted during the election campaign in 2024, affects the prices for commodities that the US imports from abroad as well as the outlook for inflation, a key factor in the pricing of interest rate futures. The then president-elect also signalled a different approach to financial regulation, with less emphasis on enforcement and a more welcoming approach to cryptocurrencies.
More than 260 people responded to the survey, with 56% located in North America, 27% in Europe, and 17% in the rest of the world. Forty one percent of the respondents work at clearing firms, executing brokers and other intermediaries. Twenty one percent work at asset managers, hedge funds, principal trading firms or other types of customers, and the remainder work in other segments of the industry, primarily infrastructure providers such as exchanges and service providers such as tech vendors.
Growth outlook by region and asset class
In addition to gathering input on the likely drivers for trading volume, the survey asked for breakdowns by region and asset class. Generally, the commodities asset class ranked highest for growth potential over the next two years, with interest rates and credit close behind. There were important differences across the survey respondents, however. Brokers and other intermediaries put the highest weighting on commodities, with rates and equities a distant second. In contrast, exchanges and clearinghouses put equities at the top of their list, and rated cryptocurrencies as having the same growth potential as commodities. Customers took yet another view, putting interest rates and credit at the top of their list, with equities and commodities tied for second.
Outside the core markets of Europe and North America, survey respondents ranked India as the area with the highest growth potential. This reflects the massive growth in recent years driven by retail trading of equity options, which has attracted trading firms, brokers and service providers from other parts of the world. The Middle East ranked second, followed by China and Brazil at roughly the same level.
Again, the survey revealed differing opinions among the respondents. The customer category, which includes asset managers, hedge funds and principal trading firms, rated China and India about the same, and Middle East last. In contrast, brokers and other intermediaries put China last and Middle East second.
Treasury clearing
The central clearing mandate for the US Treasury securities market ranked as one of the top market structure issues going into 2025. Although this mandate is not directly related to derivatives trading or clearing, many of the firms involved in derivatives markets will be subject to this mandate. And many of the firms that provide clearing services for derivatives are weighing the business opportunities created by the mandate.
The survey asked respondents to draw on their knowledge of clearing to answer two questions related to the Treasury clearing mandate. First, the survey asked for feedback on the pros and cons of having more than one clearinghouse for cash Treasurys and repos. Three clearinghouses are expected to compete in Treasury clearing once the mandate takes effect, which introduces both the benefits of competition and the challenges of operational complexity. More than half of survey respondents expressed a positive view on competition among clearinghouseswith only 9% taking the opposing view.
Second, the survey asked which attributes are the most important in determining which clearinghouse to use. Respondents ranked cross-margining, margin methodology and balance sheet treatment as the top three.
Cross margining refers to arrangements among clearinghouses to calculate margin requirements based on positions held at more than one clearinghouse. In the Treasury market today, CME Clearing and the Fixed Income Clearing Corporation have a cross-margining agreement in place for Treasury futures and cash Treasurys, but it is limited to a small number of firms that are members of both clearinghouses. CME and FICC have said they aim to expand this program to include customers, a move that could entice hedge funds and other firms with positions in both markets.
Views varied across types of firms, however. Customers ranked fees as one of the top attributes they are seeking from clearinghouses. Brokers and other intermediaries, meanwhile, put a higher weighting on balance sheet treatment, a key factor in determining how much capacity they have to clear trades for customers.
Market structure issues
The survey also asked for feedback on a potential move towards vertical integration in the derivatives markets. Historically, executing brokers and clearing brokers have operated independently of exchanges and clearinghouses in regulated futures markets. In recent years, a few companies have combined these functions within a single ownership structure. That type of structure has caught on in unregulated crypto markets, where it has allowed new entrants to quickly build market share. In more established markets, however, market participants have raised concerns about conflicts of interest, especially if a clearinghouse has to manage the default of a member that is also an affiliate.
The survey showed strong but not universal opposition to this type of vertical integration. Roughly half of the survey respondents viewed this as a negative development for the futures markets. One quarter see it as a positive development, and one quarter held a neutral opinion. Drilling into the details, four out of five people in the customer and intermediary category took a negative view on vertical integration, but nearly half of the respondents working at exchanges and clearinghouses had a positive view.
The survey asked for feedback on another recent trend: the growth of prediction markets in the US. These markets operate within the regulatory framework established for futures exchanges, but structure their contracts as binary options. Participants can use these markets to speculate on the outcome of almost any event, including political elections, and they have proven very popular with retail traders.
Only one third of the survey respondents think the growth of prediction markets will benefit the futures industry. The rest dismissed these markets as either irrelevant or pernicious. Thirty-one percent said these markets are an “interesting but minor sideshow” compared to the mainstream futures markets. Forty-four percent said they “encourage gambling behaviour” and undermine the reputation of traditional futures markets.
Changing view of GenAI
Turning to technological trends, the survey asked respondents to rank several emerging technologies in terms of their potential impact on the trading and clearing workflow. Most noteworthy, the survey found attitudes towards generative artificial intelligence have changed.
A year ago, when FIA conducted a similar survey, GenAI ranked third after the development and adoption of operational standards and the application of tokenisation in collateral management. This year, GenAI ranked first, with tokenisation a close second.
That shift in perceptions most likely reflects the rapid incorporation of GenAI into workflows and greater familiarity with its capabilities. In the financial services industry, banks are deploying GenAI-based tools to assist their employees and vendors are adding AI capabilities to their offerings.
For example, JP Morgan Chase said in December that the bank has deployed an internal AI assistant called “LLM Suite” to more than 200,000 employees. The use cases include AI-generated ideas for bankers and advisors to share with clients and AI code generation tools for the bank’s software developers. The bank also is looking for ways to optimise “every single process” using AI and large language models.
Tokenisation has a more specific application in derivatives markets, with many banks, technology companies and clearinghouses exploring ways to use tokenisation to improve the collateral management process. If some portion of the collateral needed to meet margin requirements can be transformed into tokens and moved more efficiently, the potential savings could be enormous. Eurex Clearing, the largest derivatives clearinghouse in Europe, announced in January that it had received a “non objection letter” from German regulator BaFin allowing it to accept digital collateral recorded on a distributed ledger platform. Eurex plans to begin offering this service later this year and said JP Morgan plans to participate.
