Industry concerns about risk management practices in the credit derivatives business have been thrown into sharp relief by a new survey from The International Swaps and Derivatives Association (ISDA) showing a 128% rise in the use of the complex financial instruments.
According to the survey, the notional amount for credit derivatives grew by almost 48% in the first six months of the year to $12.43 trillion from $8.42 trillion. This represents a year-on-year growth rate of 128% from $5.44 trillion at mid-year 2004.
Robert Pickel, executive director and CEO of ISDA, says: "This strong growth also highlights the importance of ISDA's and our members' efforts to improve the infrastructure of the business in order to increase operational efficiency and reduce risk."
Earlier this month ISDA said it has signed the world's major derivatives dealers to its new electronic messaging protocol which is designed to remove some of the paper clogging up back offices.
The new Novation protocol - which will initially apply to credit and interest rate derivatives - streamlines the transfer of existing trades to third parties via the exchange of electronic assignment messages rather than written consent, as is currently the case.
The 14 banks summoned to meet at the Federal Reserve Bank of New York to discuss risk management practices in the credit derivatives markets were among the first to sign up to the protocol.