CDS notional reached $6.3 trillion at end of 2004, BIS says

The Bank for International Settlements (BIS) included figures on credit default swaps (CDS) trading for the first time in its semi-annual over-the-counter (OTC) derivatives market report. According to the recently released report, the notional amounts outstanding of CDS hit $6.3 trillion at the end of 2004.

According to the BIS, $2.7 trillion of this total is accounted for by contracts between reporting dealers. For both protection bought, and protection sold, more than 80% of the outstanding contracts between reporting dealers and non-dealers were with non-reporting financial institutions.

In terms of maturity of the outstanding contracts, more than 70% of single-name contracts had a maturity between one and five years - close to the corresponding figure for multi-name contracts (60%).

The CDS data was collected by central banks from major global dealers, in a similar way to those on other OTC derivatives. Data being collected this year for subsequent reports will ultimately be presented with a counterparty and maturity breakdown similar to that used for other OTC derivatives. In the following year, the BIS is seeking even greater granularity and will present counterparty breakdowns, as well as breakdowns by rating category and sector.

The BIS report for the second half of 2004 shows strong growth in the overall OTC market. Total amounts outstanding rose by 12.8% to $248 trillion at the end of December.

The market’s expansion was driven by increased activity in interest rate products - in particular, euro and sterling interest rate swaps. The overall interest rate derivative market grew by 13.8% to $187 trillion; swaps grew by 15% to $147 trillion; interest rate options grew to 13.6% to $27 trillion, forward rate agreements (FRA) fell by 3% to $13 trillion.

The BIS attributes the growth in euro- and sterling-denominated interest rate swaps to the more negative outlook for European growth, which translated into more moderate expectations of future short-term rate increases. Euro- and sterling-denominated swaps were both up by 20% to $59 trillion and $12 trillion, respectively.

Growth in the dollar-denominated interest rate swaps market posted only 7.9% growth, slowing to $45 trillion, down 25% from the first half of the year. BIS says that slowdown could be related to the dramatic fall in US implied volatilities during the second half of 2004, which reduced hedging demands for these products.

According to the BIS, foreign exchange derivative notionals grew by 9.5% over the second half of 2004.