Boston, MA, USA
January 30, 2004
Credit Derivatives: Friend or Foe?
Report Published by Celent
The credit derivatives industry is expected to be
worth over US$7 trillion notional outstanding by 2006.
The
credit derivatives market has developed at a breathtaking rate. In the
early 1990s the market was virtually nonexistent; by 2002 it was valued at
slightly over US$2 trillion notional outstanding and Celent expects it to
exceed US$7 trillion by 2006. And new types of credit derivative products
have been introduced at a dizzying pace. In a new report, Credit
Derivatives: Friend or Foe?, Celent examines the driving forces of
the market and the factors that could possibly derail it.
Credit derivatives still account for just
slightly more than one percent of the overall market for derivative
contracts among commercial banks. However, the overall derivatives market
increased less than three-fold from 1997 to 2003, while the credit
derivatives market grew nearly sixteen times over. "Relative to other
derivative products, the market for credit derivatives is still in its
relative infancy but growing at a rapid pace," says Adam
Josephson, research analyst in the securities and
investments group at Celent and author of the report.
As a sign of the market’s increasing maturity,
credit indices now come from different providers, and a heated battle has
ensued over which set of indices will emerge as the industry standard.
Both claim to be attracting significant liquidity and to be close to
getting credit derivative contracts listed on an exchange. However, Celent
expects TRAC-X, the index introduced by JP Morgan and Morgan Stanley, to
eventually emerge with all the liquidity over iBoxx. TRAC-X has more
global coverage, has attracted greater volumes and is further along in
getting listed on an exchange.
As exchange-traded indices become a reality, many
more participants will flock to the market. The ISDA and market
participants will continue to prove capable of addressing legal matters as
they arise. And the front-to-back office solutions available to market
participants will continue to improve, thereby helping smaller firms with
fewer resources participate in the market, and the larger participants
will make the operational adjustments necessary to ensure a stable
marketplace.
A Table
of Contents is available online.
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