Credit derivatives still leading OTC growth, says BIS

Credit derivatives continued to be the fastest-growing sector of the over-the-counter market this year, despite rising numbers of early terminations.

According to the Bank for International Settlements, the six months to June 2006 saw a 46% increase in notional values of outstanding credit default swaps, to $20.3 trillion from $13.9 trillion. This was despite increased activity by tear-up companies such as TriOptima, which terminated almost $4 trillion in overlapping contracts.

Meanwhile, growth continued to prove strong in interest rate derivatives, with notional rising 24% to $262.3 trillion - a faster rate of increase than in 2005. Euro-denominated products grew faster than dollar positions, the BIS said.

Foreign exchange derivatives rose strongly, and market values recovered to $1.1 trillion, close to the levels reached in early 2005. But commodity trading slowed - the market grew only 17% to $6.4 trillion, compared with 27% in the second half of 2005.

The BIS pointed out that notional amounts can overestimate market risk: gross market values were up only 3% to $10 trillion.