Downturn feared for credit derivatives

Global credit derivatives totals have spiked 113%, according to Fitch Ratings. The total amount of credit derivatives bought and sold hit $49.9 billion at the end of 2006, more than double the $23.4 billion figure from the end of 2005. Banks and broker-dealers bought up $24.6 trillion in credit derivatives last year, up 117% from 2005. Hedge funds have also helped drive the credit derivatives markets, as they are responsible for nearly 60% of all credit default swaps, Fitch said in its report. However, given recent market events, hedge funds and banks will probably try to close out their positions in those markets when no one wants to take on credit risk. Bear Stearns, whose two failing hedge funds were invested in mortgage-backed securities and collateralized debt obligations, was also on Fitch’s list of the top 20 credit derivative traders. Last year, the firm, along with Morgan Stanley, Dresdner, Royal Bank of Scotland and ABN Amro, increased its use of CDOs.