Navigating the derivatives surge: Risk and capacity in a volatile market

Key Takeaways

• Market turmoil has led to a spike in derivatives trading as market participants look to hedge their risks.
• Operational efficiency has taken on a new meaning as firms attempt to cope with the increased activity.
• Generative AI and tokenization in collateral are considered the game changers.

What’s driving the derivatives surge in 2025?

Global derivatives markets are undergoing a transformative shift, driven by heightened volatility, and structural innovation. Trading volumes hit record highs in the first half of 2025, and the upward trajectory is set to continue. This is due to market conditions, plus the adoption of advanced technologies such as generative AI and tokenization to help manage operational complexity and scale.

The spike in activity is evident in the International Securities and Derivatives Association (ISDA) H1 figures, which showed that index credit derivatives traded notional soared nearly 92 percent to $10.5 trillion in the first half of 2025 ($5.5 trillion in H1/2024). Meanwhile, interest rate derivatives (IRD) trading surged by 48.6 percent to $249.4 trillion from $167.8 trillion during the same timeframe.

Tariff uncertainty and geopolitical drivers

There is no doubt that wavering tariff policies from the Trump administration unsettled markets. But continued interest rate unpredictability, evolving central bank policy expectations, and persistent macroeconomic uncertainty also took their toll. The combination forced market participants to review their risk management strategies and the instruments that were best placed to both mitigate the threats and capture opportunities.

Industry insights: Crisil Greenwich Coalition findings

These views are reflected in the recent Crisil Coalition Greenwich report, “How firms will manage the growing derivatives market”. The study on which the report is based found that 70 percent of the 263 derivatives market participants and experts canvassed expect trading volumes to continue rising this year due to ongoing market turbulence. While there has been some reduction in tariff-related tension, trade uncertainty and geopolitical conflicts linger, prompting nervous investors to rely on derivatives for hedging.

Regional market trends

The growth of derivatives markets will be across the globe, although countries such as India will enjoy more of a boost than others. This is partly due to the significant rise in India’s retail use of options, with figures from the Futures Industry Association (FIA), revealing that equity options volumes on the National Stock Exchange of India expanded from 14.6 billion contracts in 2021 to 123.4 billion contracts in 2024.

The Middle East is a standout, reflecting the maturation of the region and the increased volatility in its energy markets. China and Brazil are also highlighted in the report, despite the latter’s stubbornly high inflation. Brazil’s derivatives markets benefitted from a strong performance from fixed income and a fund management industry with $1.7 trillion of assets under management.

Solutions to scale and manage risk in derivatives markets

If the predictions of robust growth are correct, the industry will need to up its game. It will require a more resilient infrastructure to accommodate the ballooning trading volumes. “Operational risk increases, and capacity challenges become more pronounced,” said Stephen Bruel, Senior Analyst on the Market Structure and Technology team at Crisil Coalition Greenwich and author of the report. “The industry will need new solutions to help manage this rapid growth.”

These solutions will come in the form of innovative technologies. Around 35 percent of respondents point to generative AI and nearly a third to tokenization in collateral management as the main game-changers over the next five years. The buy-side is bullish on AI, with 43 percent ranking it as the most impactful. The sell-side, which faces more complex margin and collateral requirements, is more evenly split—29 percent favor AI, with 32 percent prioritizing tokenization.

The two technologies are at different stages of evolution. To date, proven use cases for AI in trading have not been fully realized, but the technology shows promise in other areas. These include streamlining manual processes in reconciliations, and analyzing large datasets and documents in the ISDA master agreements and credit support annexes (CSAs)

Meanwhile, tokenization is being employed to alleviate persistent collateral inefficiencies, which have become more prominent in the current tumultuous environment. Counterparty credit risk has been elevated this past year, but many firms still grapple with outdated systems and operational bottlenecks. Tokenization can help address these issues by digitizing and automating the management of collateral assets, offering a faster, more secure, and flexible collateral deployment, according to the report.

The capacity constraints are not just technological. Since the financial crisis in 2008, the derivatives industry has been subject to increasing legislative scrutiny. In Europe, for example, there have been several iterations of European Market Infrastructure Regulation (EMIR), which aimed at improving the quality, consistency, and transparency of reporting. The latest version – EMIR Refit, which came into force last year – attempts to amend and simplify the original regulation by addressing disproportionate compliance costs, enhancing disclosure and access to clearing for certain counterparties.

Firms must also comply with Basel III capital requirements, which limit how much risk banks can take on, regardless of market appetite. While potential regulatory relief may ease the pressure in some jurisdictions, capital remains a finite resource. Technologies that improve operational efficiency and lower costs are in demand as they can help firms reallocate capital more strategically, preserving market access as volumes rise.

Conclusion: Preparing for the next phase of growth

Overall, the Crisil Coalition Greenwich report notes that firms are striving for greater control, collaboration, and consistency across operations. The result has been the emergence of automation and standardization as parallel imperatives. For sell-side firms operating in low-margin businesses like futures trading, scale is essential for protecting profitability. On the buy-side, fierce competition and fee pressure drive the need for cost efficiency and differentiated client service.

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