Concern about the operational risks associated with the mounting value of credit default swaps is rising again following the publication of new data on the scale of the market. The notional amount outstanding of credit derivatives grew by 52% in the first six months of the year to $26.0 trillion from $17.1 trillion, according to the mid-year survey by the International Swaps and Derivatives Association (ISDA).
The annual growth rate for credit derivatives is 109% from $12.4 trillion at mid-year 2005. For the purposes of the survey, credit derivatives consist of credit default swaps referencing single names, indexes, baskets, and portfolios.
The notional amount outstanding of interest rate derivatives, which include interest rate swaps and options and cross-currency swaps, grew by 18 percent to $250.8 trillion from $213.2 trillion. The annual growth rate for interest rate derivatives to mid-2006 is 25 percent from $201.4 trillion in mid-2005.
The notional amount outstanding of equity derivatives, which consist of equity swaps, options, and forwards, grew by 15 percent from $5.5 trillion to $6.4 trillion. This represents year-on-year growth of 32 percent from $4.8 trillion at mid-year 2005. “The rapid pace of innovation in privately negotiated derivatives, coupled with ISDA’s ongoing work to standardize documentation, continues to fuel the growth of the business by enabling more and more firms to benefit from these risk management tools,” says Robert Pickel, Executive Director and Chief Executive Officer of ISDA. “This growth comes during a time in which ISDA, our members and our industry have made substantial progress in increasing operational efficiency and reducing operational risk. We remain focused on further improvements.”
The survey collects and aggregates notional amounts outstanding as of the reporting date, adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 101 firms provided data. All major dealers responded.