At its Annual General Meeting here today, the International Swaps and Derivatives Association (ISDA) announced the results of its Year-End 2006 Market Survey of privately negotiated derivatives.
The notional principal outstanding volume of credit default swaps (CDS) grew 33 percent in the second half of 2006, rising from $26.0 trillion at June 30, 2006 to $34.5 trillion at December 31, 2006. This compares with 52 percent growth during the first half of 2006. CDS notional growth for the whole of 2006 was 102 percent, compared with 103 percent during 2005. The survey monitors credit default swaps on single-names, baskets and portfolios of credits and index trades.
Notional amounts of interest rate derivatives outstanding, which include interest rate swaps and options and cross-currency interest rate swaps, grew almost 14 percent to $285.7 trillion in the second half of 2006. For the year as a whole, interest rate derivatives notionals rose 34 percent over 2005, which is above the annual growth rate of recent years.
Notional amounts of equity derivatives outstanding, consisting of equity swaps, options, and forwards, grew 12 percent from $6.4 trillion to $7.2 trillion in the 2006 second half. Annual growth was 29 percent, compared with 34 percent during 2005.
The above notional amounts, which total $327.4 trillion across asset classes, are an approximate measure of derivatives activity, and reflect both new transactions and those from previous periods. The amounts do not, however, represent the risks associated with the activity; in order to determine risk, it is necessary to estimate net replacement cost, which ISDA does not collect.
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 November 2006, gross mark-to-market value is approximately 2.7 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 $327.4 trillion as of December 31, 2006, gross credit exposure before netting is estimated to be $8.8 trillion and credit exposure after netting is estimated to be $1.6 trillion.
“The privately negotiated derivatives industry continues to experience robust growth, reflecting both continued innovation and the globalization of risk management activity across geographic borders and business sectors,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “Through our strong global presence, and the active involvement of our members, ISDA plays an important role in fostering innovation, reducing risk and enabling broader adoption of these important risk management tools.”
The ISDA Year-End 2006 Market Survey reports notional amounts outstanding for the interest rate derivatives, credit default swaps, and over-the-counter equity derivatives as of December 30, 2006. 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, 96 firms provided data on interest rate swaps; 91 provided responses on credit derivatives; and 91 provided responses on equity derivatives. Although participation in the Survey is voluntary, all major derivatives houses provided responses.
