The credit derivatives market is one of today’s most important over-the-counter markets. The growth of the market has outperformed all expectations, rising from a notional value of $5 trillion in 2004 to over $20 trillion in 2006, according to the British Bankers Association. This phenomenal growth in the size of the market has been matched and to some extent driven by the array of new credit derivative products; index trades, tranched index trades and options on credit default swaps to name just a few. Furthermore, the market is soon to enter the next phase of its evolution, exchange-traded credit derivative futures. On March 27, Eurex is set to launch the world’s first exchange-traded credit derivatives contract, a future based on the Itraxx Europe index, the most widely traded index in the over-the-counter market. Depending on market demand and sufficient OTC market maker support, Eurex will also list futures contracts on the Itraxx HiVol and Itraxx Crossover indices, either simultaneously on March 27 or soon after. [...]
The introduction of credit derivative futures is a crucial part of the credit derivatives market’s development. They will provide more liquidity in the market and give more investors access to credit and the opportunity to hedge. In fact, the futures contract should ultimately help cultivate the OTC credit derivatives market and bring a larger number of participants into the underlying market. No doubt issues will arise but the markets will deal with them and evolve in the way they always have done. Success in terms of volumes may not be immediate, but that does not mean credit derivative futures will fail. There is no doubt that the credit derivative market presents a major opportunity, but the exchanges have to do more than just hope they get it right, not only by providing relevant products at launch and educating their client base but by being able to weather setbacks and adapt to market needs on an ongoing basis. Only then will they fully capitalize on the phenomenal growth of credit derivatives.
Any comment, Sir JC Kommer??
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