The Effects of Innovative Instruments to Market Participants and the Financial System: The Particular Role of Information Technologies

The Effects of Innovative Instruments to Market Participants and the Financial System: The Particular Role of Information Technologies

Demetres N. Subeniotis, Ioannis A. Tampakoudis
Copyright: © 2010 |Pages: 17
DOI: 10.4018/978-1-60566-996-0.ch014
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Abstract

Financial innovation triggered new ways in which financial institutions and corporates cope with credit risk since the advent of credit derivatives. A variety of new developed financial instruments, often complex products, offers significant advantages to market participants and its key players and in particular financial institutions. As statistics indicate, advanced computerization is by large the most important factor for the wide use of credit derivatives. More efficient loans portfolio management, further business expansion and confidentiality are the main benefits for banks. In addition, various non financial firms benefit from these tailor-made products. More importantly, credit derivatives are key elements of the financial systems’ stability, through increased liquidity, risk reallocation and credit risk pricing. Nevertheless, these innovative products are accompanied by significant considerations on behalf of users and policy makers. Out of which documentation, pricing, regulation and concentration are the central concerns. Market participants and regulators should face the challenges of credit derivatives market so as to boost the trouble-free intensive growth of these instruments.
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Market Statistics

The rapid growth of credit derivatives is confirmed by market statistics, although no single data source provides precise information for the entire market. Credit derivatives are considered over-the-counter products thus the accurate determination of their values outstanding is complicated. Two main sources publish credit derivatives statistics twice a year, i.e. the International Swaps and Derivatives Association (ISDA) and the Bank of International Settlements (BIS)2, collecting data from dealers3. In both sources a considerable increase either in notional amounts4 or gross market values5 is identified, despite the minor differences of the statistical data surveys. Table 1 and Figure 1 present the notional amounts of credit derivatives as depicted in both the organisations from the outset of semi-annual surveys publishing. Additionally, for each notional amount the semi-annual and annual percentage differences have been calculated.

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