NEW YORK (HedgeWorld.com)–Preliminary results of Fitch Ratings’ survey of global financial institutions use of credit derivatives found that hedge funds are one of the fastest growing and most influential segments of the market for these products.
As protection buyers, hedge funds make up 5% to 10% of the total market. According to Fitch this influential segment could present “additional challenges to the market related to hedge funds’ propensity for minimal disclosure, their demonstrated ability to influence pricing/liquidity and the potential for increased counterparty risk.”
The survey, however, did not include any hedge funds. Fitch surveyed 200 global banks, insurance companies, reinsurers, financial guarantors and broker-dealers and focused primarily on those selling protection through credit derivatives and collateralized debt obligations.
Fitch found that a surprising level of counterparty risk is concentrated among the top 10 global banks and broker-dealers. “While these institutions generally are solid investment-grade risks, material nonperformance due to financial deterioration or contractual disputes is a potential risk,” said Roger Merritt, managing director of Fitch Ratings, in the statement. The top three bearers of counterparty in this market are: J.P. Morgan, Merrill Lynch and Deutsche Bank. Mr. Merritt also said that although the conventional view is that banks are primarily net buyers of protection, nearly three-quarters of the European banks surveyed are net sellers.