CDS research from FRBNY


Last week the Federal Reserve Bank of New York published some detailed research on traded volumes of CDS in May-Sep 2010. Some analysis I saw in the WSJ reinforced our earlier views that the traded volume is *extremely* thin & therefore the rationale of a forced multi-dealer trading facility, i.e., SEF, is tenuous at best.

Further analysis by the FT Alphaville team is here. Have a look – you may be surprised!

EU has opened two antitrust probes into transparancy in CDS market


The EU has opened two antitrust probes into transparency in CDS market.

First Probe: CDS information market: The first investigation focuses on the financial information necessary for trading CDS. The Commission has indications that the 16 banks that act as dealers in the CDS market give most of the pricing, indices and other essential daily data only to Markit, the leading financial information company in the market concerned. This could be the consequence of collusion between them or an abuse of a possible collective dominance and may have the effect of foreclosing the access to the valuable raw data by other information service providers. If proven, such behaviour would be in violation of EU antitrust rules (Articles 101 and 102 of the Treaty on the Functioning of the European Union – TFEU). The 16 CDS bank dealers are: JP Morgan, Bank of America Merrill Lynch, Barclays, BNP Paribas, Citigroup, Commerzbank, Crédit Suisse First Boston, Deutsche Bank, Goldman Sachs, HSBC, Morgan Stanley, Royal Bank of Scotland, UBS, Wells Fargo Bank/Wachovia, Crédit Agricole and Société Générale.

The probe will also examine the behaviour of Markit, a UK-based company created originally to enhance transparency in the CDS market. The Commission is now concerned certain clauses in Markit’s licence and distribution agreements could be abusive and impede the development of competition in the market for the provision of CDS information.

Second Probe: CDS clearing: In the second case, the Commission is investigating a number of agreements between nine of the above 16 CDS dealers (Bank of America Corporation, Barclays Bank plc, Citigroup Inc, Crédit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, Inc., JP Morgan Chase & Co, Morgan Stanley and UBS AG) and ICE Clear Europe. These agreements were concluded at the time of the sale, by the dealers, of a company called The Clearing Corporation to ICE. They contain a number of clauses (preferential fees and profit sharing arrangements) which might create an incentive for the banks to use only ICE as a clearing house. The effects of these agreements could be that other clearing houses have difficulties successfully entering the market and that other CDS players have no real choice where to clear their transactions. If proven, the practice would violate Art 101.

The Commission will also investigate whether the fee structures used by ICE give an unfair advantage to the nine banks, by discriminating against other CDS dealers. This could potentially constitute an abuse of a dominant position by ICE in breach of Article 102.

Full details here:

The Streetwise Professor has added his thoughts to the EU probe here

BIS Data shows most CDS trades not be suitable for trading on a SEF


The Bank of International Settlements (BIS) today released data covering outstanding positions in the global OTC Derivatives markets.

Whilst overall outstanding OTC positions are down some 4% to $583 trillion, gross market value of existing OTC contracts rose by 15% to $25 trillion.

Notional amounts of Credit Default Swaps (CDS) outstanding declined for the 5th semiannual period (due to terminations of existing contracts).

Interesting to note that the BIS has for the first time included Central Counterparties (CCP) in the breakdown of outstanding contracts by counterparty for CDS positions. Although further reading shows that CCP accounted for only 11% of outstanding CDS positions. This relatively low figure reflecting the “non-standard” nature of much of the CDS positions captured by the BIS survey (see section 3.2 on page 6 of report).

So, if the vast majority of CDS positions are non-standard, and thus not suitable for clearing by CCP, does that not also imply that the vast majority of CDS trades would  therefore also be exempt from having to trade on a ‘SEF’?