Bank chief warns on risk from derivatives

BANK of England Deputy Governor Sir Andrew Large today added his voice to warnings that the explosion of the credit derivatives market could undermine financial stability.

'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 in a speech in Istanbul.

'The growth of derivative instruments and advent of a range of new asset classes, despite added dispersion and better risk management, have added to the risk of instability arising through leverage, volatility and opacity.'

Large's warning came as rumours circulate in the City that several hedge funds are in trouble after incurring huge losses in the complex financial instruments, especially collaterised debt obligations.

These bundle up different types of bonds and then separate them into different tranches with varying degrees of risk.