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People Like Derivatives

This article appears courtesy of Institutional Investor


Two new reports show that the derivatives market continues to grow apace.

In its third annual global credit derivatives survey, released this morning, Fitch Ratings reports that the market in credit derivatives it surveys grew 86% $5.3 trillion.

"The market continues to grow at a phenomenally fast rate," Fitch analyst Roger Merritt said. "And we're not necessarily capturing the whole market, so the actual size of the market might be anywhere from $8 trillion to $12 trillion, which means it might actually be bigger than the corporate bond market."

The fastest growth, according to Fitch, was among "other" products, including indexed products and collateralized debt obligations, up 425%. Single-name CDS rose 88% and portfolio products 48%.

Banks remained a major player, transferring some $427 billion of risk off their balance sheets to insurance companies, other banks and hedge funds. "Hedge funds represent about 30% of the trading volume in the credit derivative market," according to Merritt. "A lot of the flows are going into hedge funds."

Echoing those findings, the Bank for International Settlements said yesterday that the credit derivatives market grew by 16% to hit a record $11 trillion in market value in the first half of 2005.

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