Trade in emerging-markets debt continued to skyrocket last year, surging 40% to $2.76 billion, according to a survey of 80 financial institutions by the Emerging Markets Traders Association.

The trading leaders among commercial banks - Citicorp Securities, J.P. Morgan, Chase Manhattan Bank, and Chemical Bank -contributed to a survey that showed that "emerging markets" is no longer synonymous with Latin America.

"There is a continuing geographic diversification in trading activity," said Michael M. Chamberlin, executive director of the traders group. (See related story on page 26.)

While Latin American assets still account for approximately 80% of emerging-market debt, rapid growth is occurring in Eastern Europe, he said.

Over the last two years, the volume of trading in Russian debt has increased to $71 billion from $678 million, and that of Bulgaria has increased to $25.3 billion from $1 billion.

"This market is clearly no longer just a Latin American market," said Mr. Chamberlin. "We're starting to see much more interest in Russian, Polish, and Bulgarian assets."

Bulgarian assets became one of the top 10 most-heavily traded when Bulgaria created Brady bonds from its debt. This type of bond, backed by the U.S. government, was created during the LDC crisis of the 1980s.

Brady bonds accounted for more than $15 billion of Bulgaria's $25 billion trading volume in 1994. "The jump (into the top 10) was directly attributable to their Brady deal," said Mr. Chamberlin.

Indeed, the much more liquid Brady bonds were more actively traded than their earlier incarnation, loans. The worldwide volume of Brady bond trading reached $1.68 trillion in 1994, up from $248 billion in 1992.

The volume of sovereign loans, meanwhile, was $244 billion in 1994, up only slightly from $229 billion in 1992, and down from $274 billion in 1993.

The ratio of bond to loan trading moved from 1 to 1 in 1992 to 7 to 1 in 1994. A great deal of loans converted to bonds, which traded more actively than the loans.

Since their inception, Brady bonds have served their intended purpose, transforming troubled loans to salable securities, increasing liquidity in the market.

Investors have responded to greater liquidity across the board in the emerging-market arena, boosting the volume of local instruments denominated in local currencies 79%, to $370 billion.

"We saw a pronounced increase in local instruments in 1994," said a senior trader at a commercial bank. "As a lot of them became more liquid and yields dropped considerably in 1993, this asset class attracted attention from mutual and hedge funds," the trader said.

Commercial banks enjoy their competitive advantages in trading and underwriting local securities.

Commercial banks can originate a lot of business and deliver local products because of their presence on the ground in the market, said a senior trader. "Capital at commercial banks is also an advantage," said the trader, "which puts us in a convenient position vis-a-vis investment banks."

Bankers found the notion of reducing their commitment to emerging markets in light of lower profits absurd. "This area has been a huge money- maker for the banks," said a senior trader. After a rough year of scant profits, "people will look at risk management, just like in any area, to see if they can mitigate these risks," he continued.

Bankers expected volume to remain flat through 1995, or decrease. "A lot of the volume was interdealer activity," said another trader. "I think that's been somewhat curtailed."

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