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To: westpacific who wrote (18628)	5/3/2002 4:30:14 PM
From: westpacific	Respond to of 74559

Europe to see explosive credit derivative growth Friday May 3, 11:08 am Eastern Time Reuters Company News By Jane Merriman, European investment bank correspondent LONDON, May 3 (Reuters) - Use of complex and controversial credit derivatives looks set to grow rapidly in Europe as a way for banks and other companies to manage risk, despite being famously labelled "toxic" by some in the industry. ADVERTISEMENT Investment bank Morgan Stanley (NYSE:MWD - news) expects explosive growth in the European market for these financial instruments, used to hedge against loan defaults, as usage catches up with the United States where the products originated. "The stock market has spoken," said Annabel Littlewood, head of derivatives trading at the bank, noting that banks that had managed their credit risks in this way had seen their stock prices perform better than banks which had not. Littlewood told a seminar this week that banks had been among the main users over the past three to five years. They can reduce their loan book concentration and exposure to possible bad debts by buying credit derivatives and improve their return on equity. This has shifted much of the banks' credit risks on to insurance companies, which have been heavy sellers of these products in search of higher returns. Credit derivatives are hedging tools to mitigate or lay-off risk and include products known as collateralised debt obligations and credit default swaps. But the rapid growth of these financial instruments has unnerved regulators. Howard Davies, who heads Britain's Financial Services Authority (FSA), said earlier this year that one banker had described them as "the most toxic element of the financial markets today." MAJOR DEFAULT Regulators are worried after the collapse of U.S. energy trader Enron (Other OTC:ENRNQ.PK - news) last year that these derivatives could concentrate risk in a way that could destabilise the financial system if there were a major default. On Friday the FSA reiterated its concerns in a consultation paper. "The most active participants appear to have developed a good understanding of the products, but care is still needed in the management of these new, innovative and complex products," it said. Estimating the global market for credit derivatives at between $1 trillion and $1.5 trillion, the UK regulator said it would work with overseas counterparts on new reporting requirements to improve the quality of information in this sector. Morgan Stanley estimated that the number of transactions in credit default swaps in London had increased more than forty times since 1998, with trading volumes increasing at a greater rate in London than New York. Littlewood said a growing realisation in Europe that credit risk needed to be managed should help drive further growth. But she said here were still potential barriers to the market developing further. There was still no global standard contract for these instruments and no central clearing system for trades. Selling or trading these products also required high-level legal expertise, which could be an expensive business, Littlewood said. Some contracts lacked clarity, causing legal wrangles in some circumstances, she said, citing Railtrack Plc (RTK.L), Britain's debt-laden rail network operator, where difficulties with a credit derivative contract took two weeks to resolve