UK - The average number of credit default swaps (CDS) trades executed each month increased by 89% during 2005, according to London-based Markit Group’s annual ‘scorecard’ of market volumes in credit derivatives.

But hedge funds and not pension funds have been the driver of this rise in credit CDS last year, said Jonathan Davies of Reoch Consulting, which partners Markit in the production of the scorecard data.

“On the counterpart side, much of the increase in CDS volumes has been due to increasing hedge fund involvement,” said Davies. He added that UK pension funds had been slow to become involved in the credit derivatives market.

“In addition, third tier banks, private banks and some traditional funds which have not been involved to date are coming into line,” he said.

There has also been a marked increase in the volume of credit index trades transacted in 2005, with one index trade done for every three single name trades, compared to a ration one in eight in 2004, said Markit.

However in Japan, trading volume in credit derivatives declined by about 20% over the past 12 months, according to research by US group Greenwich Associates. “Interest rate derivatives trading volume fell even further.”

All in all Japanese investors stepped up their cash bond trading activity by 65% over the past year as growth in total trading volume outpaced increases in fixed income assets under management.

Japanese government bonds (JGB) accounted for a growing proportion of fixed income assets being traded. “JGB trading volume increased by 73% from 2004 to 2005 and now accounts for more than 80% of total cash bond trading in Japan,” said Greenwich.