More derivatives dealers are trying to jump-start the market for credit derivatives by offering potential customers free credit risk measurement tools.
Credit Suisse First Boston's derivatives group last week became the latest to offer an on-line a credit risk management system, and several other major trading banks, including CIBC Wood Gundy, are expected to offer their own credit risk measurement wares soon. J.P. Morgan & Co. made available its own system six months ago.
Many of these tools were used as the trading banks' in-house risk measurement systems, and traders say making them available to whoever wants them makes good business sense.
"The better clients understand their own risks, the more likely they are to start thinking in terms of trading credit," said John Crystal, global head of credit derivatives at Credit Suisse Financial Products.
Trading of credit risk is viewed by many bankers as the next frontier of risk management. In the future, derivatives dealers hope, bankers from the biggest money-center to the most modest community bank will routinely assess credit risk within their loan portfolios and adjust the risks to levels they want.
Credit derivatives would enable users to price and then sell off these risks, such as likelihood of default, from loan portfolios to counterparties willing to bear the risks.
While banks for a long a time have been able to shed credit risks by syndicating loans, traders say the magic of credit derivatives is that they enable banks to unload risks without notifying their customers.
Until now, credit derivatives have been a tiny part of the derivatives market, which has a notional value of about $60 trillion.
Only 10 banks reported using credit derivatives in the second quarter, according to the Office of the Comptroller of the Currency, with a total notional value of $25.6 billion.
One reason derivatives designed to shed market risk are so prevalent is the rise of risk management tools like value-at-risk, a computer system that tries to measure how a company's balance sheet would respond to changes in markets. With these systems, corporate treasurers can determine with some precision what kinds and amounts of derivatives they need to shield them from, for example, changes in foreign currency rates.
Derivatives dealers at Credit Suisse Financial Products, J.P. Morgan, and other trading banks hope that by offering their credit risk measurement systems to bankers, an industry standard will develop and, they hope, one with the bank's name on it.
Whichever bank wins this race, Leslie Rahl, principal at Capital Market Risk Advisors, a consulting firm in New York, believes the software becoming available will go a long way toward helping companies assess credit risk.
"Corporations may set rules saying they won't enter into a foreign currency swap with a duration of longer than three years, when, if you can do the analysis, you may find a 10-year Treasury note is riskier," Ms. Rahl said. "Any sort of tool that helps companies make these decisions in a more sophisticated way is welcome."