Saturday, November 19, 2005


Credit Swap Risk Too Concentrated: Fitch

Bloomberg reports that Fitch Ratings sees a problem in the derivatives markets. "The $12.4 trillion market for credit derivatives is dominated by too few banks, making it vulnerable to a crisis if one of them fails to pay on contracts that insure creditors from companies defaulting, Fitch Ratings said."

"JPMorgan Chase & Co., Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley are the most frequent traders in a market where the top 10 firms account for more than two-thirds of the debt-insurance contracts bought and sold, Fitch said."

"Investors use so-called credit-default swaps to insure debt payments or bet on credit quality. Demand surged this week for swaps protecting payments by General Motors Corp. 'Risk concentration remains high,' said Ian Linnell at Fitch in London. 'In the event that there was a major default, for instance General Motors, and then one of the major dealers also defaulted, the market would be in major trouble.'"

"Credit-default swaps are the fastest growing part of the $270 trillion derivatives market, based on the so-called notional value of the debts that underlie the contracts, according to the Bank for International Settlements. The default swaps market worldwide jumped 60 percent to $10.2 trillion in the first half of 2005, the BIS said in a report yesterday."

"In a credit-default swap, the buyer pays an annual premium to guard against a borrower's failing to pay its debts. In the event of default, the buyer gets paid the full amount insured, and hands over defaulted loans or bonds to the swap seller. Swap prices typically decline when creditworthiness improves, and rise when it worsens."

"The annual cost of insuring $10 million of GM debt for five years using default swaps rose to a record of $2.35 million upfront plus $500,000 a year, compared with an annual premium of about $1 million early last week, according to Deutsche Bank prices. The debt-insurance contracts changed hands at about $260,000 at the start of this year."

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