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Derivatives

Australian Credit Volumes Nearly Double

Australian over-the-counter credit derivatives have rebounded with a 93.4% year-on-year volume increase to AUD89 billion for 2005/06, after falling 32.24% to AUD46 billion for 2004/05.

Australian over-the-counter credit derivatives have rebounded with a 93.4% year-on-year volume increase to AUD89 billion for 2005/06, after falling 32.24% to AUD46 billion for 2004/05. According to a report by the Australian Financial Markets Association, OTC equity trading also picked up 27.1%, against a previous drop of 51.77%. A breakdown of the credit improvement reveals that major contributors to turnover increase were credit-default swaps--gaining 76.3%--and credit basket swaps--gaining 323.6%.

The report cites the strong economy as one of the reasons for the general upturn, as well as the county's close ties with buoyant Asian economies. Irfan Khan, head of equity structured products at Citigroup in Sydney noted that in addition growth in equity and credit has been fuelled by more derivative-based investments. "Investors are focused on yield and on getting defined outcomes," he said. Specific to equity, Khan felt that reduced volatility has meant that investors are looking to derivatives for additional leveraged exposure as well as protection.

A local credit head commented that the growth in credit was similar to trends globally because Australian investors, like their global counterparts, have been looking to structured credit to boost returns while spreads are tight.

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