[NYTr] "Credit derivatives" market grows by nearly half in six months

[All the News That Doesn't Fit]

Bloomberg - Nov 22, 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a58EF32GpHeg&refer=home

Credit derivatives market grows by nearly half in six months

By Kabir Chibber
Bloomberg News Service

The market for derivatives grew at the fastest pace in at least
nine years to $516 trillion in the first half of 2007, the Bank for
International Settlements said.

Credit-default swaps, contracts designed to protect investors against
default and used to speculate on credit quality, led the increase,
expanding 49 percent to cover a notional $43 trillion of debt in
the six months ended June 30, the BIS said in a report published
late yesterday.

Derivatives of debt, currencies, commodities, stocks and interest
rates rose 25 percent from the previous six months, the biggest
jump since the Basel, Switzerland-based bank began compiling the
data. Investors have been turning to credit derivatives as a way
to speculate on a growing risk of defaults amid record U.S. mortgage
foreclosures.

"The pace of increase in the credit segment outstripped the rises
in other risk categories," Christian Upper, a BIS analyst in Basel,
wrote in the report. Credit-default swaps are "the dominant
instrument," accounting for 88 percent of credit derivatives, the
BIS said.

The money at risk through credit-default swaps increased 145 percent
from last year to $721 billion, the report said. The amount at stake
in the entire derivatives market is $11.1 trillion, according to
the BIS, which was formed in 1930 to monitor financial markets and
regulate banks.

Derivatives are financial instruments derived from stocks, bonds,
loans, currencies, and commodities or linked to specific events
like changes in interest rates or the weather. The report is based
on contracts traded outside of exchanges in over-the- counter market.

Increased trading pushed ICAP Plc to a record this week as the
world's largest broker of transactions between banks reported a 34
percent increase in net income to 80.1 million pounds ($164.4
million). The London-based company, which profits when prices
fluctuate, handled a record amount of transactions as financial
institutions bet on or hedged against losses linked to home loans.

The Markit CDX North American Index of credit-default swaps on 125
investment-grade rated companies has almost tripled since February
to 90 basis points from 33.

Buyers of credit-default swaps receive the face value of underlying
debt in the event of nonpayment, in return for the defaulted
securities or cash equivalent. A basis point increase in the cost
of a contract covering $10 million of debt is equivalent to $1,000
a year.

Interest-rate derivatives remained the largest part of the market,
gaining 19 percent to $347 trillion outstanding by June, the report
said. Single currency interest-rate swaps made up 79 percent of the
market.

Foreign exchange derivatives grew by 21 percent to $49 trillion as
the dollar declined 2.5 percent against the euro in the first half.
Contracts on the Swiss franc increased 32 percent, trailed by 27
percent increases in both the U.K. pound and the Canadian dollar
contracts, the BIS said.

Equity market derivatives grew by 23 percent in the first half to
$9 trillion. Growth was highest in Latin America equity derivatives
at 43 percent and lowest in Japan at 6 percent. Japan's Nikkei 225
index rose 4.8 percent during the period while the MSCI Latin America
index increased 25 percent.