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Derivatives: Swinging around the world

The pace of development of new derivative products may have slowed since the heady days of the early 1990s, not least because users are more aware of what they are buying and what it ought to cost. But new instruments are still catching on and specific geographical markets are adapting to special local needs. Andy Webb reports

Derivatives markets are constantly on the move. Credit products currently feature most prominently in the considerations of derivatives providers and sophisticated users, though there are plenty of other developments contending for attention. These include asset packaging, access products, volatility derivatives, the declining role of exotic products, and the hedging of corporate share-incentive schemes.

Geographically, Europe and the US remain highly active markets for derivatives and Asia is also important, though oversupply may be developing there. Australia is beginning to attract attention, not least because of the special derivative needs of an electricity market in the course of being deregulated.

Product developments

Credit derivatives Most banks now regard credit derivatives as a separate asset class in their own right. From a banking viewpoint they are probably as significant a development as the emergence of the swaps market a decade ago. In the last 12 months the market has reached critical mass; it's no longer just a case of matching up one-off transactions. Serious potential clients have sorted out their internal policies, legal issues and documentation and so are ready to deal.

There are also encouraging signs on the administrative and regulatory front, with International Swaps and Derivatives Association documentation developed and clear capital guidelines having emerged from the US Federal Reserve and the Office of the Comptroller of the Currency.

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