BIS reports derivatives growth

Credit derivatives are the fastest-growing sector of the over-the-counter derivatives market, according to data published by the Bank for International Settlements (BIS).

The central banks’ central bank has revealed that the notional value of the total global credit derivatives market grew more than sixfold to $4.5 trillion in the three-year period to the end of June 2004. This represented “remarkable growth”, says the bank.

Credit default swaps (CDS) account for 84% of that volume as they become increasingly attractive to investors. Fabio Fornari, a senior economist at the BIS in Basel, pointed to the standardisation of terms, such as greater consensus over what gives rise to a default, and standardisation of the maturity of CDSs to a five-year horizon, as key factors driving the use of these instruments.

The emergence of trading platforms, CDS indices such as the newly unified index iTraxx, and the issuance of collateralised debt obligations (CDOs) are also responsible, says the BIS.

The credit derivatives data is published as part of the BIS’s triennial survey of the foreign exchange and derivatives markets. This year the survey included a measure to assess concentration in the market, examining, for example, whether there is a rise or fall in the number of active dealers. While this data is currently only provided for interest rate, foreign exchange and equity-linked derivatives, the BIS started collecting data on credit derivatives in December and plans to publish concentration measures for the CDS market this year, says a source close to the bank.

The BIS survey covers 52 countries, including the top 10 industrialised countries. Dealers report their transactions to the BIS via their own central bank.

Amounts outstanding in OTC credit derivatives market ($bn) National amounts Gross market values End-Jun01 End-Jun 04 End-Jun01 End-Jun 04 Credit derivatives 695 4477 21 131 Forwards and swaps 536 3846 - - Options 158 631 - - NB All figures adjusted for double-counting. Notional amounts adjusted by halving positions vis-a-vis other reporting dealers. Gross market values calculated as the sum of the total gross positive market value of contracts and the absolute value of the gross negative market value of contracts with non-reporting counterparties. Source: BIS