CDOs and the Global Capital Markets
Credit derivatives have been the most powerful driving force for change in the structured finance market. In 1996, the global credit default swap market was only $100 billion to $200 billion in size. Morgan Stanley estimated the credit default swap market grew to $2.4 trillion in 2002. The British Bankers’ Association (BBA) estimates that credit default swap volume was close to $1.2 trillion in 2001 and grew to $1.9 trillion in 2002. These figures do not include asset swaps or total return swaps. By 2004, London had captured more than 50 percent of the global credit default swap trading business. ISDA estimated the market size as $8.42 trillion in 2004 and more than double that at $17.3 trillion in 2005. In 2006, ISDA estimated the market size at $34.5 trillion, while the BBA’s estimate was $20 trillion. For year-end 2007, ISDA estimated outstanding credit derivatives contracts at more than $62.2 trillion. Market size may reach more than $80 trillion outstanding contracts by the end of 2008. While growth has slowed in the CDO market, credit derivatives seem more robust—but 2008 year-end numbers have not yet been tallied. This over-the-counter (OTC) market is difficult to estimate, since transactions are private and off balance sheet. It isn’t surprising that different sources have different estimates of market size.
Credit derivatives drove the explosive growth of the global CDO market through the first half of 2007, but cynical use ...