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Derivatives

Aussie Mart Grows Despite Equity Contraction

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The Australian derivatives market grew by over 20% last year, according to an industry survey, but the figure hid huge variations between instruments.

Ken Farrow

The Australian derivatives market grew by over 20% last year, according to an industry survey, but the figure hid huge variations between instruments. Credit derivatives grew by some 40.9% while equity derivatives fell by nearly 74%. The fall in equity derivatives was largely predictable because last year volumes had surged by a dizzying 716% on the back of fund managers hedging cash positions and a retail product boom (DW, 12/15). Equity traders attributed the slump to more end users shifting trading to exchange-traded products such as listed options and futures.

The increase in credit derivatives to some AUD71 billion (USD52.2 billion) stems from an increase in the number of dealers, more synethetic CDOs and basket products and the introduction of the Dow Jones iTraxx Australia. There is also still room for the basket transactions to increase. The Australian Financial Markets Association report says, "Internationally, basket style transactions account for around 25% of credit derivatives turnover, whereas in Australia basket transactions account for only 5%."

"Global CDO issuance has been a big factor," said Mark Christensen, head of domestic credit trading at ANZ in Sydney, noting that many collateralized debt obligation portfolios over the last year have included Aussie names to boost the diversity score.

The overall Australian OTC derivatives market expanded by nearly 21% over the year. "Another 20% increase is fantastic," said Ken Farrow, chief executive of AFMA in Sydney, noting that total size of the financial markets has ballooned from AUD38 trillion to AUD68 trillion since 1999. The summary is based on changes over Australia's fiscal year, which runs from July 1 to June 30.

Market participants also anticipate further growth next year as the domestic economy continues to fire on all cylinders. "The Australian economy is still strong and business in general is extremely positive--so if that's the tone I can only expect continued growth," Farrow enthused.

Market Turnover (AUD Billion)
  2001-2 2002-3 2003-4
Swaps 2,608 3,768 3,421
I-Rate Options 87 82 124
OTC Equity Derivatives  20 158 41
Credit Derivatives 22 51 71
Currency Options 889 1,700 1,983
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