While a relatively small share of the overall credit derivatives market, EMCD have grown significantly since their inception in 1996. However, firm data on the precise size of the EMCD market is difficult to obtain, reflecting similar issues regarding the broader credit derivatives market. Most recent estimates tend to center around a figure of roughly $300 billion of notional contracts outstanding. The British Bankers' Association bi-annual Credit Derivatives Report for 2003/04 finds that out of the $3.5 trillion total notional value of credit derivative contracts outstanding at end-2003, roughly $250 billion, or seven percent, were contracts written on sovereign emerging market assets. The BBA report projects that sovereign EMCD will grow roughly in line with the overall credit derivatives market to reach $660 billion in 2006.
The market encompasses roughly under 700 underlying credits, of which some 170 are considered liquid. Roughly 30 of the underlying reference entities are emerging market sovereigns. Liquidity appears to be highly linked with that of the underlying reference asset, with Mexico, Brazil, and Russia and other large sovereign issuers standing out, while the corporate EMCD market appears dominated mainly by quasi- sovereigns, blue-chip firms, and companies with large FX revenues, again reflecting the ability to hedge in the cash market. Particularly liquid corporate names in recent years have included the large Russian oil and gas companies, the Mexican and Brazilian energy companies, and selected Asian names. The market for credit derivatives covering credits of emerging market banks appears to be limited.
In terms of trading volume, a survey by the Emerging Market Traders Association shows annual trading volume of $197 billion in 2003. The survey also shows significant recent growth, with 2H03 volume of $125 billion, 74% greater than trading in the first half of the year.3 According to EMTA, market participants cited the introduction of EM Credit Default Swap Indexes, such as JP Morgan's TRAC-X index in August 2003, as contributing to increased trading activity.
EMTA trading survey results at the regional level show some significant contrasts with the regional distribution of outstanding emerging market sovereign debt, with trading volumes split as follows: 41% Asia 41%, Latin America 39%, Eastern Europe 14%, and the Middle East and Africa 6%. 4
To put these figures in context, outstanding notional EMCD of roughly $300 billion is similar to the market capitalization of the EMBI Global index ($265 billion as of end-March, 2005), but is relatively small vis-à-vis total external debt securities issued by, and BIS cross-border bank lending to, borrowers in emerging market countries ($737 billion as of December 2004 and $887 b i l l i o n a s o f S e p t e m b e r 2 0 0 4 , r e s p e c t i v e l y ) a n d g r o s s l o c a l c l a i m s o f $ 6 4 4 b i l l i o n a s o f M a r c h By trading volume, EMCD volumes were only roughly 6% of total emerging market debt 2004.5
trading volume for the second half of 2003 according to EMTA’s surveys. Finally, it is important to bear in mind that notional values of EMCD contracts likely include potentially significant double counting, as market participants may report both sides of the same trade.
Major participants include large commercial and investment banks, investment managers (including mutual funds, pension funds, and insurance companies), commodity traders, and hedge funds. Market participants appear to have been largely stable, with one study participant
3 4 See 2003 Annual Emerging Market Credit Derivatives Volume Survey, May 12, 2004. Regional weights in JP Morgan’s EMBI Global index at end-March 2005 were: Latin America 57%, Europe 25%, Asia 12%, and the Middle East and Africa 6%. Bank for International Settlements, Quarterly Review 5