Central bank reports more leverage in swaps market

The second half of 2002 saw a sharp rise in leverage in the interest rate swap market, according to the June issue of the Bank of England's Financial Stability Review.

The ratio of the gross-market value of interest rate swaps to notional amounts outstanding rose from 2.7% to 4.2% over the period. That higher level was also significantly above the 3.3% level seen in 1998.

The review also cited a growing number of hedge funds and increased volumes of securitisation – in which arrangers have an incentive to achieve the greatest possible leverage consistent with target ratings – as other possible sources of system leverage in financial markets.