ANATOMY OF A GEOPOLITICAL SHOCK: THE DERIVATIVES MARKET AS A SYSTEMIC SHOCK ABSORBER

Abstract

This study investigates the structural shifts and volume dynamics within the over-the-counter (OTC) derivatives market following the acute geopolitical shock of March 1st. The escalation of military conflict involving the United States and Iran, characterized by the targeted bombing of strategic infrastructure and the subsequent closure of the Strait of Hormuz, catalyzed a precipitous surge in crude oil prices to the USD 110–140 per barrel range. Utilizing a quantitative comparative analysis of Commodity Futures Trading Commission (CFTC) weekly swap dollar volume data, this research evaluates market behavior from the pre-shock baseline of February 13 to the post-shock environment of March 13. The methodology prioritizes market-facing trades to isolate organic demand, distinguishing between cleared and uncleared transactions across interest rate, credit, and foreign exchange (FX) asset classes. The core finding reveals a 42% increase in total swap dollar volume, rising from USD 31.5 trillion to USD 44.8 trillion. This expansion was driven by intensive risk hedging and a systemic "flight to safety" as participants navigated heightened inflation expectations and the pro-cyclicality of margin requirements. Credit Default Swap (CDS) volumes more than doubled, reflecting acute concerns regarding corporate and sovereign default contagion. While Interest Rate Swaps exhibited a significant migration toward central clearing to mitigate counterparty risk, FX swaps remained predominantly uncleared, highlighting a persistent strategic preference for bilateral flexibility and immediate liquidity during periods of rapid currency volatility. This analysis concludes that the derivatives market functions as a critical shock absorber, though resilience is increasingly dictated by the interplay of regulatory mandates and bespoke liquidity needs.