Fitch to conduct credit derivatives survey to bring more transparency to the market

By Sara Rosenberg

New York, Dec. 12 - Fitch Ratings is conducting a survey of banks, insurance/monolines/reinsurance and securities firms in an attempt to bring greater transparency and understanding to the credit derivatives market, which has grown from basically nothing in 1997 to $2 trillion by year-end and is expected to rise to $4.8 trillion by 2004.

Despite more than $225 million of U.S. and European debt defaulting over the past two years, banks have maintained good overall loan quality largely in part to their use of credit derivatives, collateralized debt obligations and other financial tools to hedge risk, Fitch said. The survey's goal is to achieve a better understanding of institutions' total net credit derivative exposure.

The survey will focus on sellers of credit derivatives, particularly those that provide protection against credit losses through the use of single name credit default swaps and investments in CDOs.

Some notable losses have already been identified by Fitch, such as the 15 CDOs that were placed on rating watch negative due to WorldCom exposure. However, the rating agency believes that other unidentified exposures remain and hopes that the survey will help identify some concentrations of credit risk.

"We share the view that growth of this market generally should prove beneficial for the global financial system by promoting greater diffusion of risk. Credit derivatives have enhanced the ability to transfer credit risk throughout the market, thereby fostering greater efficiency and diversification," said Robert Grossman, chief credit officer at Fitch, in a release. "The rapid growth, lack of transparency and relative immaturity of the market, however, warrants closer review, particularly for unanticipated concentrations of credit risk."

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