Derivatives market climbs to $370bn

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The Independent Online

The global market for financial derivatives hit a record of $370bn (£195bn) in the first half of the year on the back of a surge in the use of credit default swaps (CDS), the Bank of International Settlements said yesterday.

Trade in CDS - which are a hedge against a default on a corporate bond - soared by 46 per cent compared with the previous six months, twice the pace of the overall derivatives market. Trading in derivatives overall grew 24 per cent in the first six months, compared with 5 per cent in the second half of 2005, BIS said. It said the rate of growth would have been higher had it not been for an increase in the number of early terminations of such contracts.

Rapid growth was recorded in other market segments. Open positions in interest rate derivatives rose 24 per cent, while those in foreign exchange contracts expanded by 22 per cent.

Equity and commodity contracts grew at 17 per cent and 18 per cent respectively, according to the biannual report from BIS.

Within interest rate derivatives, sterling contracts posted the strongest rate growth although they still make up a small share of the global market. Sterling contracts rose 27 per cent, the same rate as euro-denominated products, just ahead of the 26 per cent rise in yen contracts and way ahead of the 18 per cent increase in dollar-denominated trades. But there were no significant changes in the currency composition of foreign exchange derivatives. The dollar remained the most important vehicle currency.

Almost 90 per cent of all contracts measured by notional amounts had one leg denominated in US dollars, compared with 40 per cent for the euro and 25 per cent for the Japanese yen.