Credit Derivatives Market Shrinks Amid Crisis, BIS Report Says
Dec. 6 (Bloomberg) -- The market for credit derivativesshrank in the first half of 2009 as the worst financial crisissince the 1930s stifled trading and dealers canceled overlappingcontracts, according to the Bank for International Settlements.
The amount of credit-default swaps protecting investorsagainst losses on bonds and loans fell 14 percent to cover anotional $36 trillion of debt in the six months to June 30, theBasel, Switzerland-based bank said today. The broader market forover-the-counter derivatives grew, according to the report.
Investors shunned credit derivatives in the first quarterafter the collapse of Lehman Brothers Holdings Inc. and thebailout of American International Group Inc. fueled concerncounterparties wouldn’t honor trades. The market also contractedafter new rules made it easier to tear up offsetting contractsand settle trades through clearinghouses.
“Lower activity in the first half of the period, whencredit markets were still strained” and “expansion in thenetting of offsetting positions” helped cut notional volumes ofcredit derivatives, BIS analysts Jacob Gyntelberg, Karsten vonKleist and Carlos Mallo wrote in the report.
Traders are canceling overlapping default swaps to meetregulators’ demands for more transparency after the meltdowns 14months ago of Lehman and AIG, two of the largest traders. Bankshold redundant contracts because they both buy and sellprotection on the same company with different customers.
Credit-default swaps pay the buyer face value in exchangefor the underlying securities or the cash equivalent should acompany fail to adhere to its debt agreements.
Interest Rates
The size of the whole so-called over-the-counterderivatives market grew 10 percent to $605 trillion, afterdeclining in the second half of 2008, BIS data show. Derivativesare financial instruments derived from stocks, bonds, loans,currencies and commodities, or linked to specific events likechanges in interest rates. Over-the-counter contracts are thosetraded outside exchanges.
The increase was led by interest-rate derivatives, used tohedge against moves in borrowing costs, which grew 13 percent to$438 trillion, said the BIS.
The BIS was formed in 1930 to monitor financial markets andcompanies, and serves as a bank for central banks, according toits Web site.
To contact the reporter on this story:Abigail Moses in London Amoses5@bloomberg.net
Last Updated: December 6, 2009 15:00 ESTSource: Bloomberg
« Back to Business News
Related News
-
Most Asian Stocks Drop on Bernanke, Japan Stimulus; Pound Falls Dec 6, 2009 @ 01:23 PM
Dec. 8 (Bloomberg) -- Most Asian stocks fell after FederalReserve Chairman Ben S. Bernanke said the U.S. economy faces“formidable headwinds,” and Japan unveiled an $81 billionstimulus program. The U.K. pound weakened.
-
Stocks, Metals Rise on Dubai Debt Talks, Manufacturing Orders Dec 6, 2009 @ 01:23 PM
Dec. 2 (Bloomberg) -- Stocks gained from London to HongKong as concern about Dubai’s debt delay eased and metals pricesrose after U.S. manufacturing expanded for a fourth straightmonth.
-
Dubai crisis jolts markets, but early fears ease Dec 6, 2009 @ 01:23 PM
NEW YORK — Dubai's debt crisis rattled world financial markets Friday, raising concerns that some banks could further tighten lending and stall the global economic recovery.
-
US Stocks, Commodities Decline as Bonds Gain on Dubai Crisis Dec 6, 2009 @ 01:23 PM
Nov. 27 (Bloomberg) -- U.S. and emerging-market stocksslumped and commodities dropped as Dubai’s attempt to delay debtrepayments unnerved investors. Treasuries and the dollar rosewhile credit-default swaps surged.
-
Moody's Raises China Outlook to Positive From Stable Dec 6, 2009 @ 01:23 PM
Nov. 9 (Bloomberg) -- Moody’s Investors Service raisedChina’s ratings outlook to “positive” from “stable,” citingthe government’s success in steering the nation through theglobal financial crisis.
