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One of the most significant developments to occur in the capital markets over the past two decades has been the dramatic growth of the OTC derivatives market. According to the Bank For International Settlements, the total notional of outstanding OTC derivative contracts has grown from US$1 trillion in 1987 to over US$684 trillion by the end of June 2008. Inevitably, the inventory of Counterparty Credit Risk ("CCR") retained by OTC derivative dealers has increased in line with this growth, further accentuated by a dramatic increase in concentration within the OTC derivatives market.
At the end of June 2008, the Bank for International Settlements reported that gross current replacement cost reported by dealers, defined as the gross value of contracts that have a positive replacement cost after taking into account legally enforceable bilateral netting agreements, stood at $3,859 billion. Accordingly, it would not be unreasonable to assume that the current inventory of outstanding OTC derivative contracts has created in excess of $10 trillion of CCR. |
