Outstanding notional on CDSs drops for first time

The Bank for International Settlements (BIS) today released statistics for the over-the-counter derivatives market, which revealed that, although the overall market continues to grow, the outstanding notional on credit default swaps has declined.

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