By Simon Miller

Privately negotiated credit default swaps shrank last year according to the International Swaps and Derivatives Association (ISDA).

Average trading volumes for OTC credit derivatives fell 20% in 2011 while monthly volumes for credit derivatives fell to an average 9,098 compared with 11,357 in 2010 according to ISDA’s annual Benchmarking survey.

Overall, OTC derivative volumes dropped 14% with currency options falling 16% and commodity derivatives down 24%. Interest rate and equity derivative volumes rose by 14%.

Meanwhile, ISDA's 2012 Margin Survey found that collateralisation of OC derivative credit exposures continued to increase with 84% of all transactions executed by large dealers had the support of a collateral agreement while 96% of all trades executed in the credit derivative markets subject to collateral arrangements.

According to the survey, 76% of collateral delivered by respondents for non-cleared derivatives consists of cash while the remaining 24%t consisted of government securities and other collateral.

The survey also reports that 100% of large dealers and 75% of all survey respondents indicated that they pro-actively perform portfolio reconciliations.

Robert Pickel, ISDA chief executive officer commented: “As the survey clearly demonstrates, collateralisation remains among the most widely used methods to mitigate counterparty credit risk in the OTC derivatives market, and market participants have increased their reliance on collateralisation over the years."

He added: "In an evolving regulatory environment that seeks to reduce the counterparty risk associated with derivatives, the continued use of bilateral collateralisation has, in the same way as clearing, an important role to play in risk mitigation.”

The role of central counterparties (CCPs) in clearing trades and in managing collateral is of growing importance. This year, the survey asked 14 large dealers to indicate their levels of collateralisation with central counterparties and reported that the large dealers delivered approximately $50bn (£30.8bn) of collateral as margin in central counterparties: $49.6bn in their executing broker capacity and $0.7bn in their clearing member capacity.

The 2012 Margin Survey also showed that active collateral agreements number almost 138,000, of which 85% are ISDA agreements.

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