Credit Swaps Market Cut to $38 Trillion, ISDA Says (Update2)
By Katrina Nicholas and Abigail Moses
April 22 (Bloomberg) -- Credit-default swap dealers cut the volume of outstanding trades to $38.6 trillion last year as they tore up overlapping contracts amid pressure from regulators to scale down the privately negotiated market and reduce risk.
Outstanding contracts fell 38 percent in 2008, the New York-based International Swaps and Derivatives Association said in a survey released in Beijing today. It’s the first annual decline, after the market increased 100-fold over the previous seven years as investors used the derivatives to protect against bond losses and speculate on creditworthiness.
Traders have been rushing to cancel redundant trades as federal authorities seek to impose regulations on the market for the first time since it was created a decade ago. After the collapse of Bear Stearns Cos. last year, 17 banks that handled about 90 percent of trading in default swaps agreed to initiatives including trade compression to help reduce day-to- day payments, bank staff paperwork and potential for error.
“In the current environment, firms are intensely focused on shrinking their balance sheets and allocating capital most productively,” said ISDA Chief Executive Robert Pickel, whose group represents dealers that control trading.
More than 2,000 banks, hedge funds and asset managers trading credit-default swaps agreed to a “Big Bang Protocol” this month that aims to improve transparency and confidence in credit-default swaps. It changes the way the swaps are traded so that it’s easier to eliminate offsetting trades and move them through a clearinghouse.
Industry Overhaul
Regulators including the Federal Reserve Bank of New York have called for an overhaul of the industry that was blamed for speeding the collapse of Bear Stearns, Lehman Brothers Holdings Inc. and American International Group Inc.
The tear-ups, which don’t reduce the actual amount of default and market risk outstanding, may reduce the amount of capital that commercial banks are required to hold against the trades on their books.
The U.S. banking industry had its first loss in derivatives trading last year, the Office of the Comptroller of the Currency said March 27. Commercial banks lost $836 million trading over- the-counter cash and derivatives contracts, including $9.2 billion in the fourth quarter, compared with a $5.5 billion gain in 2007.
ISDA’s survey, which monitors credit-default swaps on single names and obligations, baskets and portfolios of credits and index trades, found the $38.6 trillion outstanding was almost evenly divided between bought and sold protection.
The Depository Trust & Clearing Corp., which runs a central registry that captures most trading, puts the size of market at $28.2 trillion. |
