A hundred ways to slice up credit
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A hundred ways to slice up credit

Banks like lending money to cement relationships. With a credit derivative they can get the loan off balance sheet and lend some more. Where's the catch? The market for these products is still in its infancy, although there are pockets of liquidity. And payout practice and definitions of default need standardizing. But the market is revolutionizing the way banks handle credit and their balance sheets. Theodore Kim reports.

A big step forward in the development of the credit-derivatives market came last month when, after more than a year of preparatory work, the New York-based International Swaps & Derivatives Association (Isda) released standardized documentation for credit-default swaps. But, the market as a whole still lacks universal standards. "The issue of credit derivatives means many different things to many different people," says Ron Tanemura, head of structured debt at Deutsche Morgan Grenfell in London. "There is one end which is highly structured ­ each transaction may take weeks. At the other end, the default-swap market is becoming increasingly more liquid. There are now nearly half a dozen brokers actively covering the default-swap market."

While it is impossible to put a precise size on the whole market, unofficial estimates indicate that worldwide the total notional value of all credit derivatives exceeds $100 billion, half of which is written out of London.

So far, a great deal of the market has been characterized by numerous one-off specially tailored trades. However, a number of credit derivatives have been fairly actively traded. There is a parallel market in credit derivatives for all the Latin American Brady bonds and Eurobonds, particularly those issued in Argentina and Brazil.

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