Outstanding notional on CDSs drops for first time

According to BIS, the notional outstanding for all derivatives contracts stood at $683.7 trillion at the end of June, 15% higher than the end of 2007. Gross market values - the cost of replacing existing contracts at market prices, which is a truer indicator of market risk than notional - increased by 29% over the period to $20.4 trillion.

The only asset class to show a decline over the first half was credit derivatives: the notional outstanding of credit default swaps (CDS) fell 1% in the first half to $57.3 trillion. Although single name contracts rose 3% to $33.3 trillion, multi-name contracts (index and tranche trades) fell by 6.5% to $24 trillion.

This marked the first decline since BIS first published CDS statistics in December, and follows average annual growth of 45% in the past three years. BIS attributed the fall to early terminations and netting of outstanding contracts, with $17.4 trillion of CDS contracts terminated in the first six months, reducing the notional outstanding by 30%.

Nevertheless, the gross market value for CDS contracts increased by 58% to $3.2 billion, reflecting the ballooning of CDS spreads in 2008.

Every other asset class showed growth in the first half. The notional outstanding on interest rate derivatives rose 17% to $458.3 trillion, while gross market values increased 29% to $9.3 trillion. Growth was largely driven by interest rate swaps, the notional of which increased 15% to $356.8 trillion.

The outstanding notional of interest rate options expanded 9% to $62.2 trillion, and money market turmoil led to a 48% increase in forward rate agreements to $39.4 trillion.

Foreign exchange derivatives rose 12% to $63 trillion notional, while the gross market value increased by 25% to $2.3 trillion. According to BIS, 83% of forex contracts had one leg denominated in dollars, compared with 41% for euros and 22% for yen.

The notional outstanding of equity derivatives contracts increased 20% in the first half to $10.3 trillion, reversing a 1% decline in the second half of 2007. The gross market value of equity-linked contracts rose marginally by 0.35% to $1.15 trillion. More than half of equity derivatives are referenced to European stocks.

Commodity derivatives grew significantly in the first half, with the notional up 56% to $13 trillion and the gross market value increasing 16% to $2.2 trillion. Growth was largely a result of activity in non-gold contracts, which rose 60% to $12.6 trillion.

See also: BIS survey brings mixed message

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