Trillions of dollars of derivatives notional torn up since June

Multilateral tear-up efforts continue to bear fruit, with notional outstandings reduced by several trillion dollars, according to a report released by the International Swaps and Derivatives Association at its annual general meeting in Beijing on April 22.

Isda said trading in interest rate derivatives "remains solid", but portfolio compression efforts meant notional outstanding had fallen to $403.1 trillion by the end of 2008, down from $464.7 trillion at the end of June. Credit default swaps (CDSs) also saw a decline, with notional outstanding falling from $54.6 trillion to $38.6 trillion by the end of last year. Equity derivatives, a smaller market, fell from $11.9 trillion to $8.7 trillion. Isda estimated that, at the end of 2008, derivatives holders had a net total credit exposure of $2.7 trillion.

The latest figures represent success for the efforts of Isda and other market participants to reduce notional outstandings by tearing up offsetting trades. The second half of 2008 saw the notional of interest rate derivatives outstanding, by far the largest market, fall for the first time. Outstanding CDS notional continued to fall, after dropping in the first half of 2008 for the first time in the market's history.

Tear-up efforts are continuing this year. Stockholm-based technology firm TriOptima has run 12 trade-compression cycles for credit derivatives through its triReduce platform in the first three months of the year, tearing up $5.5 trillion of US and European index trades, tranches, emerging market deals and transactions based on the Markit ABX index of asset-backed securities.

Last year, TriOptima ran a total of 50 cycles, eliminating $30.2 trillion in notional outstanding. The single-name CDS compression service offered by New York-based electronic execution platform Creditex and London-based data provider Markit eliminated a further $2.3 trillion notional in 2008. And Isda's changes to CDS contracts, which came into force on April 8 (see page 8), are expected to increase tear-up activity further in the CDS market.

"In the past, the credit derivatives business has always been about more, more, more. But this year, it is a more nuanced story, which is a combination of continued growth and efforts to deal with outstanding trades through tear-up processes," said Robert Pickel, Isda's New York-based executive director and chief executive.

Combined with the move towards centralised clearing of certain credit derivatives contracts, the market is now in a much stronger position than it was two years ago, added Eraj Shirvani, Isda chairman and head of fixed income for Europe, the Middle East and Africa at Credit Suisse. "The rate of growth in the CDS market was so astounding for so many years. We have seen this drop, but it is still a growing market. When you look at the central clearing initiatives we have in place, we could have 85% of the CDS market centrally cleared. That will give us a solid base to grow from."

Alexander Campbell.