New double-counting methodology responsible for greater-than-expected rise in credit derivatives

The International Swaps and Derivatives Association’s mid-year survey of the over-the-counter derivatives market showed a substantial increase in credit derivatives notional volumes, growing from $918.9 billion at the end of 2001 to $1.6 trillion at mid-2002. But the figure this year was calculated according to a new adjustment rate to discount double counting, which eliminates trades between two counterparties being counted twice. This has put an excessively favourable sheen on the latest results, said Isda.

David Mengle, head of research at Isda, said the association's adjustment ratio, which was initially calculated four years ago, was updated to keep up with changes in the structure of the market. The new adjustment factor was based on the ratio used by the Bank for International Settlements (BIS), which carries out its own comprehensive survey of the derivatives markets every three years.

“Looking at the BIS survey, we drew the conclusion that the number of end-users were greater than the amount of dealers in the credit derivatives world. So, based on the BIS methodology, we raised our adjustment factor by 18%,” said Mengle. “Had we used the same adjustment factor for the previous survey, total credit derivative volumes would have been over $1 trillion at the end of last year,” he added.

According to Isda’s new methodology, credit derivatives volumes increased by 44% in the first six months of the year on a pro forma basis.

Interest rate and currency derivatives volumes also showed reasonable growth in the first half of the year, increasing by 19% to $82.7 trillion. Isda also surveyed the equity derivatives market for the first time. Total notional outstandings for equity derivatives stood at $2.3 trillion at mid-2002.

Isda’s mid-year derivatives survey is based on responses collated from around 80 of its member firms, including major derivatives houses, government entities and end-users.