Fitch Ratings said today that a survey has found that as credit derivatives market expansion continues at a remarkable pace, concern is growing about how the sector will deal with an eventual downturn.

The total amount of credit derivatives bought and sold reached nearly $50 trillion at year-end 2006, an increase of 113 percent over the $23.4 trillion reported for year-end 2005, Fitch reported.

Despite the current benign corporate credit environment, a number of market participants expressed concern for how smoothly the market can deal with an eventual downturn in the credit cycle, Fitch said.

Fitch Managing Director Julie Burke noted that these investments do not play that large a role in the portfolios of most insurance carriers.

Concerns expressed about derivatives, Fitch said, included liquidity in the event of a downturn, the impact unwinding of system leverage can have on volatility, and settlement following a credit event.

Nonetheless, survey respondents expect the market to continue its expansion, with collateralized debt obligations (CDOS), loan-only credit default swaps (LCDS) and the traded indices cited as the biggest growth vehicles for 2007.

“The growth of the indices has been well documented since their introduction, and as is clear from the figures, this expansion has continued unabated,” said Eric Rosenthal, director, and co-author of the Fitch report.

On the surface, banks globally appear to have become somewhat more conservative in terms of their credit exposure, ending 2006 at $304 billion net protection bought, although 20 of the 44 banks surveyed, or 4 percent, were net sellers of protection. “Trading” was again cited as the leading rationale for employing credit derivatives.

Special Reports /

Credit Derivatives Market Grows

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