Credit derivatives growth to reach $15 trillion in 2006 - Deutsche Bank

Source: GFI Group

GFI Group Inc. (NASDAQ: GFIG) a leading inter-dealer broker and data and analytical software provider to the derivatives markets, hosted a media briefing in New York City last week to discuss the outlook for credit derivatives in 2006.

John Tierney, head of US credit derivatives research at Deutsche Bank, said that growth in credit derivatives in 2006 could reach $15 trillion (in notional outstanding contracts). Although New York and London are the centers of credit derivatives activity, Tierney stressed that Asia and Japan (that currently account for 9% of global activity), could become bigger players in this market as a result of the Basel II recommendations. Credit-linked notes could rise sharply if a proposed FASB rule is implemented and insurance companies will also become bigger players in 2006, according to Mr. Tierney.

"We are in a relatively healthy credit cycle, and credit risk will remain at the single name level, for now, with little risk of becoming more systemic. As a result single name credit default swaps (CDS) may continue to trade at wider spreads than implied by the indexes," said Mr. Tierney.

Michael Fuhrman, head of e-trading, North America, at GFI Group expects any increased demand for credit derivatives use to occur across the capital structure in 2006, and named asset backed credit default swaps (ABCDs), preferred shares credit default swaps (PCDs) and loan credit default swaps (LCDs) as second generation CDS products that are gaining traction.

"The changing credit landscape is morphing the relationship between credit and equity asset classes," Mr. Fuhrman said, commenting on his observance that equities traders are becoming more interested in CDS. "The ever evolving CDS market gives dynamic insight into companies and CDS is definitely being used as a complementing tool to help traders in their investment decisions."

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