Credit Default Swaps Grows 100% to $1.9T; Leading Product in $3T CDx Market: Fitch Ratings Global Credit Derivatives Survey.

NEW YORK -- The Global Credit Derivatives Market (CDx) expanded to $2.8 trillion of gross sold outstanding -- $3 trillion including cash collateralized debt obligations -- increasing 71% from $1.8 last year.

According to Fitch Ratings latest survey of the global CDx market, single-name credit default swaps increased 100% from year-end 2002 to $1.9 trillion. Portfolio products, including the highly publicized traded indices totaled a more modest $754 billion, up 49%. Of note, 53% of global banks cited trading as a dominant motivation for using CDS, whereas only 19% cited credit risk portfolio management.

'While banks continue to act as protection buyers in the aggregate, there has been a clear shift in the CDx market,' said Roger Merritt Managing Director, Fitch Ratings. 'Many of the larger banks and broker dealers have moved from net protection buyers to net protection sellers, coinciding with an increased willingness among CDx dealers to inventory large 'correlation books' of credit risk. The market's explosive growth is being propelled in large measure by inter-dealer trading rather than risk transference motivations on the part of banks.'

European Banks - Buyers and Sellers

--Whereas in the aggregate European banks also continued to be protection buyers, this does not tell the whole story. Approximately one-half of the European banks, particularly regional banks, acted as protection sellers.

'These institutions actually increased the amount of protection sold year over year, particularly in the case of the German Landsebanks,' said Ian Linnell, Managing Director, Fitch Ratings. 'Protection selling via CDx is a preferable alternative for sourcing credit and generating more attractive returns than those available in their domestic markets. There is a need among banks to develop improved financial disclosure of CDx usage to allow for the adjustment of traditional credit measures to incorporate this alternative form of risk taking.'

CDx Credit Quality Declines

--Ratings quality for the CDx market declined as below-investment grade and unrated exposures increased to 18% from 8% last year. This is reflective of the lower demand for super senior protection and increased trading flows involving high-yield credits due to the continued expansion of the market into lower rated names.

Hedge Funds Continue to Grow

--Hedge fund activity grew substantially year-over-year and now comprises a sizable percentage of CDS volume (20%-30%) for a number of market intermediaries. Their prominence has potential implications in terms of event risk, liquidity and price volatility.

Insurance Sector Curbs Appetite for CDx

--While the global insurance sector's overall exposure to the CDx market as protection sellers increased, this finding is skewed by the presence of the largest, most dominant participant. Adjusting for this fact, insurance company exposures actually fell 56% in North America and 21% in Europe.

Fitch Ratings report 'Global Credit Derivatives Survey - Single-Name CDS Fuel Growth' is available exclusively on Fitch's dedicated Credit Derivatives' web site at 'www.fitchcdx.com'.