Notional protection

5 February 2008 By Richard Beales Follow @richardbeales1

The overthecounter market for credit protection has weathered a few squalls. Banks trading infrastructure has improved, too. But exponential growth has been accompanied by a scarcity of company defaults. If a real bankruptcy storm builds, there s still room for worry.

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Credit derivatives contracts outstanding increased from $1.6tr in mid2002 to $45.5tr in mid2007 and are now probably in excess of $50tr, according the International Swaps and Derivatives Association.

On January 31, ISDA announced the launch of a protocol for the settlement of credit derivatives involving Quebecor World, a Canadian printing company. Quebecor filed for creditor protection on January 21.

Also on January 31, Fitch Ratings placed 36 tranches from 20 public collateralised debt obligations and six tranches from five private CDOs on rating watch negative following Quebecor's filing. Fitch identified a total of 73 CDOs holding a total notional exposure to Quebecor of $ 5.8bn equivalent.

Moody's said last month that the global speculativegrade default rate fell in December to 0.9%, the lowest reading since December 1981. The rating agency expects the default rate to rise sharply to 4.8% by the end of this year.

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