The market for derivatives has grown to around $600 trillion. It is a market little understood by those outside of it. In the current crisis these complex and often opaque instruments have come under the spotlight. Given their size the question most frequently being asked is do they pose unnecessary risks to financial markets?
There are many types of derivatives. Some are fairly standardised and traded on exchanges. But the vast majority of derivatives are bespoke financial products traded off-exchange, i.e. over the counter (OTC) between two parties. Interest rate contracts account for almost 2/3 rds of the total volume outstanding. But the derivative that has shown exponential growth in the last few years is Credit Default Swaps. These now account for around 10% of all derivatives. Unlike most interest rate swaps Credit Default Swaps can result in large payments having to be made in the event of a bankruptcy of a company.