Bets on debt surge 77 percent this year -
Wednesday, September 22, 2004 10:27:36 PM
SAN FRANCISCO (AFX) -- Credit derivatives are red hot. These bets on the creditworthiness of underlying debt instruments have grown more than 77 percent over the 12 months ending this June, to reach $5.44 trillion, according to an international report released Wednesday
The International Swaps and Derivatives Association, a New York based group representing traders of privately negotiated derivatives, announced its tally of non-exchange-traded derivatives at ISDA's regional member conference in London
"The sharp growth in credit derivatives demonstrates the importance of these instruments as risk management tools," said Robert Pickel, chief executive of ISDA. These investments have become popular hedges in rising interest-rate environments and are generally used as a way of managing credit risk, which is defined as the likelihood of default on a debt. Banks have been improving their measurements of credit risk thanks in large part to the much-ballyhooed capital adequacy framework released this June by the Basel Committee on Banking Supervision. This in turn has ramped up demand for credit derivatives
ISDA's survey said interest-rate swaps and options combined with cross-currency interest-rate contracts have risen more than 32 percent annually, to reach $164.49 trillion by the end of the second quarter of 2004. By contrast, outstandings in the equity derivatives tracked by ISDA, which include swaps, options and forwards, totaled $3.79 trillion. "While equity derivatives aren't growing as quickly, credit derivatives are because they're a much newer market," explained David Mengle, head of research at ISDA. "New products are still being engineered, new participants are still coming in, and people are finding new reasons for buying derivatives. But changes in interest rates also prompt people to hedge their exposure." He continued, "Ten years ago, credit derivatives were more rumors than anything else. You started seeing them around 1996 or 1997, but we didn't start collecting data on them until 2001." The earliest statistics on the credit derivatives market is a 1996 count of $40 billion by the British Bankers Association. The credit default swap has been the most actively traded type of credit derivative, and now accounts for 45 percent of the market, according to the Bank for International Settlements.
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