April 16 (Bloomberg) -- Credit-default swaps worldwide expanded to cover $62.2 trillion of debt in 2007 as investors rushed to protect against losses triggered by the collapse of the U.S. subprime mortgage market.

Contracts outstanding rose 37 percent in the second half of 2007 from $45.5 trillion in the first six months, the New York-based International Swaps and Derivatives Association said today. The market, which has grown from $34.5 trillion in 2006, doubled in each of the previous three years as traders used the derivatives as a cheaper and easier way to invest in corporate debt.

``Trading volume has gone up dramatically,'' said David Verschoor, a default swap trader at BNP Paribas SA in Hong Kong. ``People are punting it harder than they punt equities.''

Credit derivative trading rose amid the global credit crisis that toppled Bear Stearns Cos., shut down hedge funds and caused more than $245 billion of asset writedowns and losses at the world's biggest banks and securities firms. The cost to protect corporate bonds from default using contracts on the benchmark Markit CDX North America Investment Grade Index more than quadrupled to a record 198.5 basis points last month from 42 at the end of June, according to London-based CMA Datavision.

Fed Brokers Sale

The turmoil prompted the Federal Reserve to broker a sale of New York-based Bear Stearns after speculation about the securities firm's solvency prompted clients to pull funds and trading partners to demand more collateral on investments.

The benchmark Markit iTraxx Europe index of credit-default swaps on 125 companies with investment-grade ratings, which peaked at a record 167 basis points last month, declined 5.5 basis points to 100.5 today, according to JPMorgan Chase & Co. The index falls as perceptions of credit quality improve.

Credit-default swaps, traded by banks and securities firms including JPMorgan Chase & Co. and Goldman Sachs Group Inc., are the fastest-growing part of the $454.5 trillion market for over- the-counter derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

Using data from the Bank for International Settlements, ISDA estimated the gross market value of all outstanding derivatives contracts is about $9.8 trillion. That would be the amount owed to banks or investors if the contracts were liquidated. Subtracting off-setting payments owed between trading partners, that number would fall to about $2.3 trillion, the group said.

ISDA estimated the market size by surveying its 215 primary members, mostly banks and securities firms. The survey covers derivatives that are privately negotiated between banks, hedge funds and other institutional investors.

Amounts at Risk

``While the amounts at risk are just a fraction of notional amounts, these give us a good sense of market activity,'' ISDA Chief Executive Officer Robert Pickel said in a statement from the industry group's annual meeting in Vienna.

The contracts, conceived about a decade ago to help bondholders hedge against the risk of default, are commonly used to bet on the ability of companies to repay debt. Sellers are paid an annual premium, usually over five years. Should the company fail to meet its debt obligations, the buyer is paid face value in exchange for the underlying securities or the cash equivalent.

Credit-default swaps increased more than three times as fast as contracts on interest rates, the largest part of the derivatives market. Interest-rate derivatives, including swaps that switch between fixed and floating-rate payments, rose almost 10 percent to $382.3 trillion in the second half, ISDA said.

Equity derivatives, which are used to bet on the direction of a company's share price or hedge against losses, were little changed at a value outstanding of $10 trillion.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net; Abigail Moses in London Amoses5@bloomberg.net

Last Updated: April 16, 2008 05:01 EDT