Credit Derivatives Doubled for Third Straight Year
By Shannon D. Harrington and Hamish Risk
April 18 (Bloomberg) -- The global market for credit derivatives, which investors use to speculate on the financial health of companies and countries, more than doubled in size in the past year to cover $34.5 trillion of securities.
The amount of outstanding credit-default swaps has now doubled for the third year in a row, the International Swaps and Derivatives Association said today at its annual meeting in Boston. The contracts, conceived about a decade ago to help bondholders hedge against the risk of default, are commonly used to bet on the ability of companies to repay their debt.
``It's hard to see volume growth tailing off,'' said Lisa Watkinson, head of structured credit business development at Lehman Brothers Holdings Inc. in New York.
Trading in credit-default swaps is surging because they are cheaper and easier to trade than bonds. The contracts are the fastest growing part of the $370 trillion market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
The survey by ISDA, which represents 750 banks and securities firms, totals the amount of debt covered by each contract at the end of 2006. The amount has increased 33 percent from $26 trillion in June and from $17 trillion a year ago.
Growth Outlook
Development of new types of credit-default swaps, such as those based on loans, will keep market volume growing, Watkinson said. Dealers including Lehman are set to introduce the first U.S. index of loan credit-default swaps this month.
``Continued product innovation in other areas, such as loan CDS, which is only at its beginning, will mean these growth rates are sustainable for a while yet,'' Watkinson said in an interview at the Boston conference.
Sellers of credit-default swaps are paid an annual premium, usually over five years. The buyer is paid face value in exchange for the underlying securities or the cash equivalent should the company fail to adhere to its debt agreements.
The survey doesn't reflect a jump in credit-default swap trading earlier this year on concerns that losses from home loans to the riskiest U.S. borrowers would hurt the broader economy.
A report last month by a division of Fitch Ratings showed that average daily volume during the first two weeks of March almost tripled from the same period a year earlier.
ISDA's survey covers derivatives that are traded over-the- counter, meaning they're privately negotiated between banks, hedge funds and other institutional investors.
The growth in credit-default swaps led interest rate, currency and equity derivatives for the fifth year.
Contracts to swap between fixed and floating interest payments, the biggest part of the derivatives market, increased 34 percent in 2006 to $285.7 trillion, ISDA said. Equity derivatives, which are used to bet on the direction of a company's share price or hedge against losses, grew 29 percent to $7.2 trillion. |
