Fitch Ratings said today that a survey has found that as creditderivatives market expansion continues at a remarkable pace,concern is growing about how the sector will deal with an eventualdownturn.
|The total amount of credit derivatives bought and sold reachednearly $50 trillion at year-end 2006, an increase of 113 percentover the $23.4 trillion reported for year-end 2005, Fitchreported.
|Despite the current benign corporate credit environment, anumber of market participants expressed concern for how smoothlythe market can deal with an eventual downturn in the credit cycle,Fitch said.
|Fitch Managing Director Julie Burke noted that these investmentsdo not play that large a role in the portfolios of most insurancecarriers.
|Concerns expressed about derivatives, Fitch said, includedliquidity in the event of a downturn, the impact unwinding ofsystem leverage can have on volatility, and settlement following acredit event.
|Nonetheless, survey respondents expect the market to continueits expansion, with collateralized debt obligations (CDOS),loan-only credit default swaps (LCDS) and the traded indices citedas the biggest growth vehicles for 2007.
|“The growth of the indices has been well documented since theirintroduction, and as is clear from the figures, this expansion hascontinued unabated,” said Eric Rosenthal, director, and co-authorof the Fitch report.
|On the surface, banks globally appear to have become somewhatmore conservative in terms of their credit exposure, ending 2006 at$304 billion net protection bought, although 20 of the 44 bankssurveyed, or 4 percent, were net sellers of protection. “Trading”was again cited as the leading rationale for employing creditderivatives.
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