Credit explosion

Credit derivatives business now tops $2.3 trillion notional. Our third annual survey of credit derivatives dealers (beginning on page 20) reveals that most firms saw their business more than double in 2002.

Credit derivatives are now getting some occasional coverage in publications such as the Wall Street Journal and the Economist. Recent articles have focused on the retreat by large reinsurers from the protection selling business, which is an important concern for the market, certainly. But our survey’s results indicate the market is nonetheless quite healthy.

The increase in vanilla business (which remains the main engine of growth), combined with a boom in portfolio transactions such as tranched portfolio default swaps, synthetic CDOs and nth-to-default baskets – at nearly $450 billion, they’re up more than a third on last year’s figure – supports dealers’ assertions that the reinsurers are no longer crucial market participants.

Indeed, our survey finds that reinsurers only account for 9.9% of end-user business, and insurers 13.6%. Hedge funds and third-party asset managers have boosted their activity, and now account for 13% and 6.8% of end-users. While still modest, it’s business with this last group that dealers see as the real future of the market.

Rogue trader?

Risk is proud of the value we provide our readers through our annual market surveys. Our three main polls – of energy and commodities market participants in February, end-users in June and dealers and brokers in September – have, through careful stewardship, become important and unique market benchmarks.

What is perhaps not immediately apparent is the amount of work that goes into verifying survey responses. We typically contact a large, random sample of our survey respondents, and we contact all those that seem the least bit suspicious. To put it bluntly, we are very careful to ensure that no firm can stuff the ballot box.

Our commodity and energy survey (beginning on page 24), conducted with our sister publication Energy & Power Risk Management, has been subject this year – for the second year running – to just such an attempt. Both were laughably ham-handed – in last year’s, someone got employees of pop music video channel MTV to submit votes.

After a careful investigation we found no evidence that the management of the firm on whose behalf both of these campaigns were waged sanctioned the attempts. Indeed, we’re inclined to think they were the result of some unintelligent junior trader’s surfeit of enthusiasm, or perhaps a competitor’s attempt to cause the firm in question some embarrassment. In any case, all the survey respondents who voted for this firm have been contacted and either verified or discarded.

The credibility of our surveys is one of Risk’s hard-won assets, and we jealously protect it. Any firm we find has attempted to influence the outcome of our surveys in any way in the future will be named in the magazine and removed from further consideration.

Dwight Cass, Editor