Electronic CDS trading to remain insignificant until 2006, says Celent

Credit default swaps (CDSs) will not be traded electronically to a significant degree until at least early 2006, according to a report.

As more participants trade index products, more CDSs will generate interest, leading to the increasing standardisation of the most liquid single-name CDSs, said research and consultancy company Celent. But it added that this will take time. Celent said it does not believe structured CDS products will ever be traded electronically, as they are too complex and illiquid.

The credit derivatives market, which Celent estimates to be worth $2 trillion in notional outstanding, should be worth more than $7 trillion in notional outstanding by 2006, it said. Between the fourth quarter of 1997 and the first quarter of 2004, the overall derivatives market grew threefold, while the credit derivatives market - still only 1.5% of the overall derivatives market for commercial banks - grew 22 times over.

Celent predicts that half of all credit index trades will be placed electronically by 2007, up from about 25% of all credit index trades now. By the end of the decade, the credit derivatives market will be where most fixed-income markets are now, it added.