The International Swaps and Derivatives Association, Inc. (ISDA) today announced the results of its Mid-Year 2008 Market Survey of privately negotiated derivatives. A webcast of ISDA executive director and ceo Robert Pickel discussing these statistics and recent market developments is available at https://secure.webex.com/g2.asp?id=WZSBDIOL. Please note that recipients will need Media Player to listen to the presentation.
"The derivatives business overall showed consistent growth over the first half of 2008, but what we are beginning to see in credit derivatives is a downturn in the notional volumes – the total amount of trades that are outstanding," said Pickel. "This decrease primarily reflects the industry’s efforts to reduce risk by tearing up economically offsetting transactions, and demonstrates the industry’s ongoing commitment to reduce risk and enhance operational efficiency. We expect to see more effects of this over time."
According to the Survey, notional amount outstanding of credit derivatives decreased by 12 percent in the first six months of the year to $54.6 trillion from $62.2 trillion, but the annual growth for credit derivatives was 20 percent from $45.5 trillion at mid-year 2007. For the purposes of the Survey, credit derivatives comprise credit default swaps referencing single names, indexes, baskets, and portfolios.
Notional amount outstanding of interest rate derivatives, which include interest rate swaps and options and cross-currency swaps, grew by 22 percent to $464.7 trillion from $382.3 trillion. This compares with 10 percent growth from $347.1 trillion during the second half of 2007. The annual growth rate for interest rate derivatives to mid-2008 is 34 percent to $464.7 trillion from $347.1 trillion in mid-2007.
Notional amount outstanding of equity derivatives, which consist of equity swaps, options, and forwards, grew by 19 percent to $11.9 trillion from $10.0 trillion. This compares with a relatively flat percent growth rate during the second half of 2007. The annual growth rate for equity derivatives to mid-2008 is 19 percent to $11.9 trillion from $10.0 trillion at mid-year 2007.
The above notional amounts, which total $531.2 trillion across asset classes, are an approximate measure of derivatives activity, and reflect both new transactions and existing transactions. 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 December 2007, gross mark-to-market value of all derivatives was approximately 2.4 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 $531.2 trillion as of June 30, 2008, gross credit exposure before netting is estimated to be $12.7 trillion and credit exposure after netting, but before collateral, is estimated to be $2.7 trillion.
The ISDA Mid-Year 2008 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of June 30, 2008. 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, 79 firms provided data on interest rate swaps; 69 provided responses on credit derivatives; and 68 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.