CDS volumes drop, DTCC plans more openness
10/31 12:06 PM
By Karen Brettell and Ciara Linnane
NEW YORK, Oct 31 (Reuters) - Credit derivatives participants have cut outstanding trade volumes while a clearing house said it would release weekly data on the market, as the industry seeks to fend of criticism that it lacks transparency and poses systemic risks.
Outstanding volumes in the market have been cut by $25 trillion in 2008, as banks and investors simplified positions by trimming contracts that offset each other, the International Swaps and Derivatives Association said on Friday.
The settlement of contracts on Fannie Mae (FNM:$0.890400,$-0.099600,-10.06%) , Freddie Mac (FRE:$1.0300,$-0.0900,-8.04%) , Lehman Brothers (LEHMQ:$0.0630,$-0.0030,-4.55%) and others, has also helped reduce volumes, the ISDA, a trade group, said.
Credit default swap, or CDS, volumes have fallen to $46.95 trillion, before accounting for new trades made since July 1.
Meanwhile, the Depository Trust & Clearing Corporation (DTCC), which clears the majority of trades in the CDS market, said it is planning to publish weekly data from the central repository it maintains.
Starting Nov. 4, the DTCC will publish a set of aggregate stock and trade data, which will include notional CDS levels on the 1,000 largest CDS reference entities.
The initiatives come amid fierce criticism of the market, which has been accused of posing systemic dangers to the financial system.
"I think the DTCC plans on greater transparency and the ongoing trade compressions are positives for the CDS market," said Tim Backshall, chief strategist at Credit Derivatives Research in Walnut Creek, California.
CDS are used to hedge against the risk of corporate or other borrowers defaulting on their debt as well as to speculate on a borrower's credit quality.
The New York Federal Reserve said Friday it is hopeful that one or more central counterparties (CCP) for credit derivatives will be operational by November or December of this year.
The lack of a central counterparty poses risks as the private nature of the $55 trillion market makes it impossible to know who is exposed to the dealer or whether they have enough collateral to be repaid what is owed on any trades.
The New York Fed said it it is hopeful a CCP will support a more open trading environment that will include exchange-traded CDS contracts.
"A well-managed CCP for credit default swaps will reduce the systemic risk associated with counterparty credit exposures," the New York Fed said in a statement.
REGULATION EYED
The initiatives come as the market faces almost certain regulation, though what form this may take is unknown.
Industry participants argue that attempts to regulate the market may impede liquidity, which could have unintended consequences such as raising borrowing costs for debt issuers, as it would make hedging debt harder.
"The government's focus on transparency, settlement, and clearing is absolutely correct and is what the CDS market needs," said CDR's Backshall.
"However, marginal efforts at regulation and reserving remain at best worthless and at worst significantly detrimental to the CDS market and implicitly the cost of funding for corporates," he said.
Meanwhile, credit derivative dealers and investors will continue to compress their trading portfolios, which will aid settlement of contracts when defaults occur.
"This reduction in notionals is major progress by anyone's standards," ISDA Chairman Eraj Shirvani, who is also Co-Head of Credit Sales and Trading at Credit Suisse, said in a statement.
"That we have been able to reduce outstanding CDS by more than $25 trillion during this period of immense growth and activity for our products is testament to the will and force behind the industry's efforts to keep operational issues firmly in check," he added.
The so-called notional figures represent activity in the contracts and do not measure the actual amount of credit at risk.
"Notional outstandings are often misunderstood," Robert Pickel, Chief Executive at ISDA, said in the statement.
"While they tend to give an exaggerated impression of amounts at risk, reducing notionals helps both front and back offices. Canceling out economically offsetting transactions reduces the cost and operational workload of managing those transactions," he said. (Reporting by Karen Brettell and Ciara Linnane; editing by Gary Crosse)
