Some market participants say the rise of these derivatives raises questions about the effectiveness of financial reform undertaken since 2008. While standardised derivatives such as interest rate swaps are now transacted in exchange-type venues and centrally cleared, the flourishing area of opaque products are not, and moreover there are few records of activity that regulators can monitor.

"We've reformed nothing," says Janet Tavakoli, president of Tavakoli Structured Finance. "We have more leverage and more derivatives risk than we've ever had."


"The markets don't really need a Lehman or even Lehman-lite event for a credit dislocation," says Manish Kapoor, managing principal at hedge fund West Wheelock Capital. "You just need spreads to widen out or rates to go up for a significant impact on collateral movement for derivatives."


The use of options tied to CDS indices, known as "swaptions", has grown sharply, buoyed in part because the instruments are not required to be centrally cleared. Such swaptions allow investors to protect their portfolios from large movements in markets, known as "tail risk".

More than $60bn of CDS index options currently exchange hands each week -- up from just $2bn traded per month back in 2005, according to Citigroup analysts.

Bob Douglass, head of credit electronic trading at Barclays, says the bank is excited about the future of these swaptions: "It's one of the really bright spots in the world of credit derivatives insofar as growth goes. We're ramping up our capacity for this."

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