Australia has seen an unprecedented surge in over-the-counter credit and equity derivatives volumes over the last financial year, according to a study to be published by the Australian Financial Markets Association. "We've seen unbelievable growth in derivatives," said Ken Farrow, chief executive in Sydney.
Equity derivatives grew by 716% in the 12 months before June, while credit derivatives trading volumes, which fell last year (DW, 10/27/02), more than doubled to AUD52 billion (USD38 billion). "This was quite a surprise," said Luke Randell, managing director in trading and derivatives at Citigroup Global Markets Australia in Sydney. The summary is based on changes over Australia's fiscal year, which runs from July 1 to June 30.
"Most of the pickup [in equity derivatives] has to do with fund managers and insurance companies hedging their portfolios over the last year," said Mark Kemp, senior equity derivatives trader at Deutsche Bank in Sydney. Kemp explained that domestic equity prices plummeted last year and fund managers entered large volumes of collars, puts and put spreads to hedge their exposure. Merv Peacock, cio at AMP Asset Management in Sydney, said AMP followed that strategy and actively hedged its AUD20 billion equity portfolio via listed and OTC index options.
The growth in retail products, with embedded derivatives, such as equity-linked loans and capital protected instruments, is also responsible for the seven-fold increase in volumes, according to Randell.
As for credit derivatives, the growing collateralized debt obligation market and the demand for traditional credit products fuelled the pick up. "There's an insufficient amount of traditional credit products and as a result investors are turning towards synthetic alternatives," said Fergus Gilbert, head of AFMA's credit committee in Sydney. Credit volumes fell the previous year because of tight spreads and a lack of concern about defaults.
