NEW YORK, Oct 31 (Reuters) - Volumes traded in the credit derivatives market have fallen by $25 trillion in 2008 as banks and investors simplified their positions by cutting down on contracts that offset each other, according to the International Swaps and Derivatives Association.
The effect of the reduction likely reduces total volumes to $46.95 trillion, before accounting for new trades made since July 1.
ISDA said last month that volumes had dropped 12 percent in the first half of 2008 to $54.6 trillion, from $62.3 trillion at the end of 2007.
The industry is working to simplify exposures by reducing trades that offset each other and by netting trades.
So-called “netting” involves reducing a portfolio of trades down to one number, which simplifies the settlement of the contracts.
“This reduction in notionals is major progress by anyone’s standards,” ISDA Chairman Eraj Shirvani, who is also Co-Head of Credit Sales and Trading at Credit Suisse, said in a release.
“That we have been able to reduce outstanding CDS by more than $25 trillion during this period of immense growth and activity for our products is testament to the will and force behind the industry’s efforts to keep operational issues firmly in check,” he added.
Credit derivatives are used to hedge against corporate or other borrowers defaulting on their debt. They are also used to speculate on a borrower’s credit quality.
The so-called notional figures represent activity in the contracts and do not measure the actual amount of credit at risk.
“Notional outstandings are often misunderstood,” Robert Pickel, Chief Executive at ISDA, said in the release.
“While they tend to give an exaggerated impression of amounts at risk, reducing notionals helps both front and back offices. Cancelling out economically offsetting transactions reduces the cost and operational workload of managing those transactions,” he said.
Reporting by Karen Brettell;