At its Annual General Meeting in Vienna today, the International Swaps and Derivatives Association, Inc. (ISDA) announced the results of its Year-End 2007 Market Survey of privately negotiated derivatives.
The notional amount outstanding of credit default swaps (CDS) grew 37 percent to $62.2 in the second half of 2007 from $45.5 trillion at mid-year. CDS notional growth for the whole of 2007 was 81 percent from $34.5 trillion at year-end 2006. The survey monitors credit default swaps on single names and obligations, baskets and portfolios of credits and index trades.
Notional amounts of interest rate derivatives outstanding, grew almost 10 percent to $382.3 trillion in the second half of 2007 from $347.1 trillion at mid-year 2007. For the year as a whole, interest rate derivatives notionals rose 34 percent from $285.7 trillion. For the purposes of the survey, interest rate derivatives include interest rate swaps and options and cross-currency interest rate swaps.
Notional amounts of equity derivatives reached $10 trillion at year-end 2007, which represents an annual growth rate of 39 percent from $7.2 trillion at year-end 2006. This number remained flat between mid-year and year-end 2007. Equity derivatives for purposes of the survey comprise equity swaps, options, and forwards.
"As ISDA’s Year-End 2007 Market Survey highlights, the privately negotiated derivatives business continues to grow. While the amounts at risk are just a fraction of notional amounts, these give us a good sense of market activity," said Robert Pickel, executive director and ceo, ISDA. "Developing tools to manage counterparty credit is an important feature of ISDA’s work. Equally important are our efforts to reinforce the operational infrastructure to enable scalable growth and improve and liquidity for the continued development of these important risk management tools."
The above notional amounts, which total $454.5 trillion across asset classes, are an approximate measure of derivatives activity, and reflect both new transactions and those from previous periods. The amounts, however, are a measure of activity, not a measure of risk. The Bank for International Settlements (BIS) collects both notional amounts and market values in its derivatives statistics and it is possible to use the BIS statistics to determine the amount at risk in the ISDA survey results.
As of June 2007, gross mark-to-market value was approximately 2.2 percent of notional amount outstanding. In addition, net credit exposure (after netting but before collateral) is 0.5 percent of notional amount outstanding. Applying these percentages to the total ISDA Market Survey notional amount outstanding of $454.5 trillion as at December 31, 2007, gross credit exposure before netting is estimated to be $9.8 trillion and credit exposure after netting is estimated to be $2.3 trillion.
The ISDA Year-End 2007 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of December 30, 2007. All notional amounts have been adjusted for double counting of inter-dealer transactions. ISDA surveys its Primary Membership twice yearly on a confidential basis. In this survey, 91 firms provided data on interest rate swaps; 81 provided responses on credit derivatives; and 83 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.