Credit derivatives see six-fold increase in three years

The over-the-counter (OTC) credit derivatives market stood at $694 billion in June, a six-fold increase in the last three years, according to the latest global triennial survey released by the Bank for International Settlements (BIS) today.

The survey, which measured the total outstanding notional amount of OTC credit derivatives at the end of June this year, shows a significant increase from the previous figure of $108 billion taken at the end of June 1998.

The BIS said the credit derivatives market has grown with the entry of new participants like insurance companies and hedge funds, and the instruments are used beyond transactions aimed at the restructuring of banks' balance sheets. A range of new credit derivatives instruments and indexes combined with the standardisation of documentation have also helped growth.

Although the credit derivatives market has shown rapid growth, it is still small compared with other derivatives products, said a European derivatives analyst. But he expects the market to continue growing.

"The credit derivatives market will continue to grow as more and more companies get credit ratings and the focus shifts to more risky types of funding, away from bank loans to securitisation," he said.

The BIS's credit derivatives figures are slightly more than the $631.5 billion figure published recently by the International Swaps and Derivatives Association (Isda), which only covered Isda's member firms.

The BIS report also gave figures on the global equity-linked and commodity derivative markets. Equity-linked contracts grew by 52% over the three-year period to $2 trillion. Commodity derivatives contracts, the oldest type of derivatives contract, grew by a more modest 33%.