By Stacy-Marie Ishmael in New York
September 27 2007
SourceThe global market for credit derivatives grew 32 per cent in the first half and increased 75 per cent over the year to the end of June, the slowest rate of growth since 2003.
Credit derivatives volumes outstanding rose by almost a third, to $45,460bn at June 30 from $34,420bn at the end of last year, the International Swaps and Derivatives Association said on Wednesday.
Over the same period last year, the notional volume of contracts outstanding more than doubled.
Derivatives are contracts based on the prices of assets or linked to events such as changes in interest rates. Over-the-counter derivatives are privately negotiated contracts. Contracts to swap between fixed and floating interest payments, the biggest component of the over-the-counter derivatives markets, increased 38 per cent to $347,100bn over the year to June 30.
“We expect this strong volume to continue over the 2007 second half, as privately negotiated derivatives have provided liquidity and functioned efficiently through the recent volatility,” said Robert Pickel, chief executive officer of ISDA.
Volumes in equity derivatives, which include privately negotiated swaps, options and forward contracts, grew 40 per cent in the first half, and are up 57 per cent over the past year, to $10,100bn. Volumes were $7,180bn at year end.
The ISDA survey does not include trading since July, when investors piled into derivatives amid a shake-out in global credit markets.
Fears of a credit crunch over the summer triggered a surge in trading volumes for derivative index contracts, which allow investors to hedge against the risk of corporate default on loans.
Anthony Ryan, the US Treasury’s assistant secretary for financial markets, said at an ISDA conference in New York on Wednesday that financial innovations such as credit derivatives had benefited investors, allowing them to better manage and transfer credit risk, and offering enhanced liquidity and greater portfolio diversification. “The ability to securitise credit has expanded the sources of capital and credit for homeowners, business owners and other borrowers throughout the global economy,” Mr Ryan said.
But he warned that investors needed to do a better job of evaluating the risk posed by complex products.
“Insufficient understanding or failure to perform an independent and adequate due diligence prior to making an investment decision is simply unacceptable. That’s not investing – that’s gambling.”
Copyright The Financial Times Limited 2007