THE Deputy Governor of the Bank of England sounded a fresh warning over the risk to the financial system of credit derivatives yesterday, describing the rapidly expanding market as “tricky and opaque”.

In a speech to regulators in Istanbul, Sir Andrew Large said that credit derivatives had introduced new threats to the stability of financial markets. “Credit risk transfer has introduced new holders of credit risk, such as hedge funds and insurance companies, at a time when market depth is untested,” he said.

Speaking as corporate bond markets steadied for the first time since Standard & Poor’s, the credit ratings agency, downgraded the creditworthiness of US car giants Ford and General Motors to “junk” status, Sir Andrew said: “The growth of derivative instruments . . . (has) added to the risk of instability arising through leverage, volatility and opacity.” He called for regulators and market participants to focus on credit concentrations in an effort to promote greater financial stability.

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