The Bank for International Settlements has published its latest quarterly review, which details the onset of the global financial crisis this fall.

It says that markets went through four basic stages. “Stage one, which led into the Lehman bankruptcy in mid-September, was marked by the takeover by the U.S. authorities of the government-sponsored housing finance agencies Fannie Mae and Freddie Mac. Stage two encompassed the immediate implications of the Lehman bankruptcy and the crisis of confidence it triggered. Stage three, starting in late September, was characterised by fast-paced and increasingly broad policy actions, as the response to the crisis evolved from case by case reactions to a more international, system-wide approach. In the fourth stage, from mid-October, pricing patterns were increasingly dominated by recession fears, while markets continued to struggle with the uncertainties surrounding the large number of newly announced policy initiatives,” it says.

The report notes that trading on the international derivatives exchanges retreated in the third quarter, with total turnover decreasing to US$542 trillion from US$600 trillion in the second quarter. Most of the contraction took place in derivatives on short-term interest rates, it reports. But turnover increased in derivatives on stock indices and foreign exchange. Turnover in derivatives on commodities, measured only in terms of the numbers of contracts, dropped although year-on-year growth remained quite high at 37%.

In the global over-the-counter derivatives markets, notional amounts outstanding continued to expand in the first half of 2008, the BIS says. Notional amounts of all types of OTC contracts stood at US$863.0 trillion at the end of June, 21% higher than six months before. By volume, credit default swap contracts registered their first ever decline (-1%), compared with an average six-month growth rate for outstanding CDS contracts over the last three years of 45%, it says. The fall was due largely to a significantly higher number of multilateral terminations of CDS contracts, as a result of the financial turbulence.

Meanwhile, OTC markets for interest rate and FX derivatives, as well as equity and commodity derivatives, recorded significant growth, the BIS says.

Borrowing in the international debt securities market lessened sharply in the third quarter amid the continued turmoil in financial markets, the bank reports. Net issuance of bonds and notes decreased to US$247 billion, down substantially from US$1,086 billion in the second quarter. The decline was well in excess of normal seasonal patterns, and resulted in the lowest level of net issuance since the third quarter of 2005, it observes.

Money market borrowing also stagnated, with net issuance falling into negative territory in the third quarter, the BIS adds.

IE