Jean-Claude Trichet, president of the European Central Bank, yesterday called for concerted action to improve transparency in global credit derivatives markets, where he said "opacity" made it difficult to assess risks to the financial system.
The private, over-thecounter nature of derivatives markets makes them notoriously difficult to measure and monitor, but the explosive growth in the use of credit derivatives continues as increasing numbers of traditional asset managers and pension funds join investment banks and hedge funds in the market.
"The opacity of the credit derivatives market, and especially of structured synthetic instruments, is a potential source of concern," Mr Trichet said.
He added that the ECB would encourage industry initiatives to promote transparency. "The reduction of systemic risk is not an objective for central banks exclusively."
Mr Trichet's remarks came as the leading industry body released data showing the outstanding notional volume of credit derivatives contracts more than doubled to $34,500 billion (€25,000 billion) in 2006. The International Swaps and Derivatives Association, at whose annual meeting Mr Trichet was speaking, also said interest rate derivatives saw higher than usual growth last year.
Mr Trichet said while credit derivatives allowed market participants to improve risk management and distribute exposures, this enhanced the resilience of the financial system only if certain conditions were met.
Meanwhile, an ECB report has found that private equity poses only a remote risk to financial stability and Europe's banking industry. A pioneering survey of 41 large banks found scant evidence that corporate leveraged-buyouts by private equity groups could create serious difficulties for the financial system. - ( Financial Times service )
