The size of the credit default swaps market shrank by almost a fifth in terms of notional outstanding contracts this year as infrastructure developments allowed banks and other investors to net off contracts more effectively and tidy up their trading books.
While the overall trading volumes in the CDS market have surged dramatically in recent months, banks have been able to manage their risks better by terminating unnecessary contracts on their books, according to TriOptima, a Sweden-based technology company that manages terminations.
Since the end of April, 39,000 CDS single name and index swaps, amounting to a notional value of $880.2bn were terminated, TriOptima will announce today. This allowed derivatives dealers to reduce their mark-to-market exposure by $16.2bn.
These terminations represent a large chunk of some 50,000 single name and index trades or $1.06 trillion worth of terminations conducted by TriOptima this year. There was $5.5 trillion of notional outstanding in interdealer CDS at the end of 2004, according to the Bank for International Settlements.
A CDS, which is a form of insurance against default, allows investors to buy and sell exposure to corporate credit markets without purchasing bonds. The growth in this market has increased the need to eliminate unnecessary trades that inflate banks’ balance sheets.
“The credit derivatives market has grown exponentially and has created a real strain in back offices,” said Susan Hinko, managing director of North America at TriOptima. “The operational infrastructure is trying to catch up to the growth in the business.”