credit derivatives markets will continue to grow in terms of outstandings, and
in the range of instruments on which they are based, but look out for the
impact of private equity financings on credit quality. These were chief among
the conclusions of an OTC derivatives media briefing hosted by GFI Group – an
inter-dealer broker specializing in OTC products – in New York City shortly before Christmas.
Tierney, head of US Quantitative Credit Strategy at Deutsche Bank, told the
briefing he saw general strength in US credit markets and expected
defaults to remain low in 2007 as the credit environment continued to improve.
One key event risk to monitor, he said, was the rising number of large M&A
deals and the increasing role of private equity players in these deals, which
he believed would continue in 2007.
also said that, despite a modest decline in CDS trading volumes 2006, outstandings
were growing strongly. After adjusting for double-counting, he predicted that
outstanding credit derivatives contracts would continue to grow more rapidly
than underlying cash bond markets in 2007.
continued use of CDS by hedge funds, mutual funds and insurance companies leads
us to believe that credit derivatives will continue to gain momentum in terms
of both volume and end users," said Tierney. "In addition, a number
of exciting new products will fuel growth in 2007."
Fewer, senior managing director, North America,
for GFI Group, expanded on these ‘next generation’ CDS products, naming CDSs on
asset-backed securities (ABCDSs) as one of the more successful new products,
that now had 30-35 single names trading daily. He discussed the success of the
ABX HE index as the most liquid instrument for this rapidly growing emerging
recent development in the sub-prime lending sector put the ABX HE index on the
map, as an important trading vehicle for those wishing to apply CDS to the
asset-backed world," said Fewer. He added that correlation and tranche
trades were the fastest growing segments of the index-linked sector and that he
believed that liquidity in this area would give rise to new index products.
he anticipated the development of a loan CDS (LCDS) index that would trade in
the first quarter of 2007, and that products would develop for CDS on
collateralized debt obligations (CDOs) the following year.
Everaert, GFI’s chief information officer, e-commerce, discussed the onset of
electronic trading for CDS. He cited 2006 as a banner year in this regard, with
95% of price discovery now being fully electronic in Europe.
number of users on our electronic trading system CreditMatch doubled this year
and we now offer more than 10,000 CDS and bonds on our system – with around 45%
of all our credit derivative transactions in Europe
now being fully electronic" said Everaert. He also identified straight
through processing as another development seeing great progress.