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.