The International Swaps & Derivatives Association (ISDA) last month said, in its twice-annual survey, that outstanding credit derivatives rose to $45.46 trillion in notional value in the first half of 2007, up 32 percent from year-end 2006. But the subsequent study, which will cover the second half of the year, may tell a different story, as market volatility has led many investors to question the value of some derivatives products, particularly those backed by subprime mortgages. On the day the current report was released, however, Anthony Ryan, the Treasury Department’s assistant secretary for financial markets, cited the numerous benefits to investors of “financial innovation such as securitized credit” before an ISDA conference in New York. Ryan asserted that the complexity of new investment instruments is “no excuse for an existing investor or buyer of such a security to justify a loss.” The speech is excerpted here.
The pace of financial innovation has gathered momentum in recent years as information technology and financial engineering have significantly changed the global capital market environment. The influence of these catalysts is evidenced by the increased diversity of investment instruments such as structured credit, investment vehicles such as exchange-traded funds, and the array of innovative investment strategies, many of which are deployed by hedge fund managers.
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