Derivatives may be losing steam

The derivatives market, which helped to take down AIG (AIG) and Lehman Brothers, may finally be losing some steam. The Bank of International Settlements (BIS) reports that for the first time since data collection started, the derivatives market shrank in the second half of 2008.

The number of outstanding contracts linked to bonds, currencies, commodities, stocks and interest rates fell 13.4 percent to $592 trillion. That's the first decline in 10 years, which is when BIS started collecting the data. Interest-rate derivatives make up the largest part of that market. They fell 8.6 percent in the second half of 2008 to $418.7 trillion outstanding.

Other markets dropped even more sharply. Foreign exchange contracts fell by 20 percent to $49.8 trillion. Equity derivatives dropped 36 percent to $6.5 trillion and those linked to commodities fell 67 percent to $4.4 trillion.