Derivatives market shrinks


Tue, Dec 08, 2009 - Page 10

The credit-derivatives market shrank in the first half of the year as the financial crisis damped trading and dealers canceled overlapping contracts, the Bank for International Settlements said.

The amount of credit-default swaps protecting investors against losses on bonds and loans fell 14 percent to cover a notional US$36 trillion of debt in the six months to June 30, the Basel, Switzerland-based bank said yesterday. The broader market for over-the-counter derivatives grew, the report said.

Investors shunned credit derivatives in the first quarter after the collapse of Lehman Brothers Holdings Inc and the bailout of American International Group Inc fueled concern counterparties would not honor trades. The market also contracted after new rules made it easier to tear up offsetting contracts and settle trades through clearinghouses.

“Lower activity in the first half of the period, when credit markets were still strained” and “expansion in the netting of offsetting positions” helped cut notional volumes of credit derivatives, BIS analysts Jacob Gyntelberg, Karsten von Kleist and Carlos Mallo wrote.

Traders are canceling overlapping default swaps to meet regulators’ demands for more transparency after the meltdowns 14 months ago of Lehman and AIG, two of the largest traders.