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ISDA: Credit Derivatives Volumes Continue to Rise, Automation Improves
April 16, 2008
The credit derivatives market continued to show strong growth in 2007, said the International Swaps & Derivatives Association (ISDA) today, and post-trade processing has been keeping pace.
The results of the ISDA year-end survey of the over-the-counter derivatives market, released at the trade group’s annual meeting in Vienna, show that credit default swaps (CDS), including single-name CDS, baskets and portfolios of credit and index trades, remained by far the fastest growing class. The notional amount outstanding of CDS increased 37 percent over the second half of last year--to $62.2 trillion from $45.5 trillion at mid-year--and was up 81 percent for all of 2007, from $34.5 trillion at year-end 2006.
For interest rate derivatives, including interest rate swaps and options and cross-currency interest rate swaps, the notional amount outstanding rose almost 10 percent, to $382.3 trillion in the second half of 2007 from $347.1 trillion at mid-year. That number was at $285.7 trillion at the end of 2006. Notional amounts of equity derivatives--equity swaps, options and forwards--reached $10 trillion at year-end 2007, up 39 percent over 2006’s $7.2 trillion, but were flat during the latter half of the year.
ISDA emphasized that the amounts do not represent the risks associated with the increase in activity but, citing data from the Bank for International Settlements, it said that gross mark-to-market value was about 2.2 percent of the notional amount outstanding. In addition, net credit exposure--after netting but before collateral--was 0.5 percent of the notional amount. Applying those percentages to ISDA’s total notional amount outstanding of $454.5 trillion as of Dec. 31, gross credit exposure before netting was $9.8 trillion and credit exposure after netting $2.3 trillion.
In a separate announcement, ISDA said that the preliminary results of its margin survey showed that the amount of collateral in circulation to support the growing volume of OTC activity grew to $2.1 trillion last year, up from $1.3 trillion. The use of cash continued to increase and now represents more than 78 percent of collateral received and 83 percent of collateral delivered.
The margin survey, which includes responses from 107 firms, also found that collateral coverage continues to grow, in terms of both trade volume subject to collateral agreements and credit exposure covered by collateral. Sixty-three percent of OTC derivatives trades are now subject to collateral agreements, compared with 59 percent in 2006. And 65 percent of credit exposure for OTC derivatives contracts is now covered by collateral, up from 59 percent last year.
“ISDA’s 2008 margin survey reflects continued importance of collateralization as a risk mitigation tool and the effectiveness of collateral agreements,” said Robert Pickel, executive director and chief executive officer of ISDA.
Despite significant growth in volumes for most OTC derivative products, post-trade processing has for the most part improved, according to the ISDA operations benchmarking survey. However, there were differing levels of effectiveness, largely reflective of where the market has put its efforts. In 2005, global regulators flagged CDS confirmation backlogs as a systematic risk and major dealers have since taken steps to streamline their back-office procedures, including the use of an array of electronic confirmation and affirmation platforms such as the Depository Trust & Clearing Corp.’s (DTCC) Deriv-Serv.
ISDA said that credit derivatives saw the highest level of automation in confirmation matching--62 percent across all respondents--while the lowest was for equity derivatives, at 23 percent. The backlog of outstanding confirmations was 6.6 business days for credit derivatives, followed by 9.9 for interest rate products and 13.3 for equity derivatives. Ninety percent of electronic confirmations for interest rate and credit derivatives were typically sent within a day of the trade date (T+1) while for equity derivatives it was T+4.
