Isda survey points to slowing credit derivatives market

The notional amount of outstanding credit derivatives dropped 12% to $54.6 trillion at the end of June 2008, from $62.2 trillion at the end of 2007, according to the mid-year market survey from the International Swaps and Derivatives Association (Isda).

Although credit derivatives volumes have risen exponentially over the past decade, much of the recent activity had been driven by unwinds and restructurings of collateralised debt obligations (CDOs) as a result of the credit crisis. With 2008 characterised by a dearth of new credit issuance – particularly of securitisations and CDOs – it seemed inevitable the credit derivatives juggernaut would slow eventually.

This was predicted by Risk in June (A slowing juggernaut?), and acknowledged by Isda’s chief executive officer Bob Pickel on Wednesday.

“This decrease primarily reflects the industry's efforts to reduce risk by tearing up economically offsetting transactions, and demonstrates the industry’s ongoing commitment to reduce risk and enhance operational efficiency,” he said. “We expect to see more effects over time.”

Pickel reiterated Isda’s stance on the credit derivatives business, which has come under heavy fire from US legislators and regulators in the past week. “Credit default swaps are not the cause of turbulence in the financial industry over the last year or so,” asserted Pickel.

Swedish post trade services firm Trioptima said the 12% decline in CDS notional outstanding was caused principally by its TriReduce tear up cycles, which allow dealers to match and multilaterally unwind over-the-counter derivatives trades. The company reported on Thursday that it terminated $17.4 trillion notional in interdealer CDSs in the first half of the year.

Activity in other classes continued to grow over the first half, Isda’s survey revealed. The notional amount outstanding of equity derivatives rose by 19% to $11.9 trillion from $10 trillion at the end of last year; while interest rate derivatives increased by 22% to $464.7 trillion from $382.3 trillion in the same time frame. Across the credit, equity and interest rate asset classes, the overall outstanding notional stood at $531.2 trillion on June 20, 2008. After netting, this equates to a total credit exposure of $2.7 trillion.

See also: Credit derivatives volumes continue to rise
A slowing juggernaut?