Notes on CDS Market, De-Risking and Re-Risking

The CDS market continues going from dead to deader. It seems the lack of liquidity is somehow spilling over into the CDS realm. Total notional barely moved up from $14.6 billion to $23.6 billion, however the number of contracts was half the prior weeks, at 9,909 total. Notable notional re-risking occurred in the basic materials ($10.7 billion) and financials ($14.5 billion) sectors, while sovereigns continued to see de-risking to the tune of $12.4 billion.

Gross outstandings week over week were again virtually unchanged at $28.2 trillion, consisting of $15.2 trillion in single-names and $13.0 trillion in index and index tranches, both metrics practically unchanged from a week ago.

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Top 20 single names saw some new interesting entrants and potential capital structure arbitrage plays. Most notably the Arcelor - Arcelor-Mittal Finance - Arcleor Finance triangle. While Arcelor-Mittal Corp (MT) saw over $1 trillion in net increase in the name, it was more than offset with a combined $1.5 trillion in net CDS reductions in Arcelor-Mittal Finance and Arcelor Finance.

Zero Hedge will investigate the attractiveness of this trade. Among other names, Russia made it back into the top 20 de-riskers, with other major de-risk names including Banc Of America (BAC), Greece, MBIA (MBI), Centex (CTX), SLM (SLM), Ingersoll Rand (IR) and the US of A.

On the re-risk side, most of the action was in sovereigns including Philippines, Norway, Spain, Colombia, Belgium, Argentina and the Ukraine. Some other curious names that were perceived as less risky include MBIA, XL Capital (XL), UBS (UBS) and Jones Apparel (JNY) (hell hath no fury like a Goldman retail CDS trader on tilt).

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Comments

[arthatek:]

and it should be deader still. we would all sleep much better.

if it was just hedging against underlying it would be ok and a useful financial instrument.

Apr 22 09:01 AM

[jklondon:]

would be great to get an index of activity in the cds market using dtcc's source, not a difficult job but they dont make the data very easy to manipulate.

Apr 22 09:06 AM

[conceptwizard:]

Over-the-counter credit default swap contracts totaled as much as $62 trillion at the end of 2007.

The New York Fed released April 02, 2009 about how much the CDS totals have been reduced:

Market participants have significantly reduced levels of outstanding CDS trades via multilateral trade terminations (tear-ups) to lower outstanding notional amounts, reducing counterparty credit exposures and operational risk. To date in 2009, tear-ups have eliminated approximately $7 trillion of CDS trade notional amounts, in addition to the $32 trillion eliminated in 2008.
Indeed, DTCC confirms that there are now approximately $25 trillion in outstanding CDS. That's still almost twice the size of America's gross domestic product.

And if the CDS numbers have been reduced from their astronomical 2007 peaks, it is partly because the American taxpayer has paid a pretty penny to make some of the CDS "go away".

Apr 22 11:36 AM

[guythomas:]

could mr Durden explain what my take away should be from this data? CDS's are not being generated because no on is borrowing? No one is lending? business is contracting and CD's are in low demand. Those de-risking are in in better shape than those Re-riskingtrouble? I look at GECC under deriskers, $70M gross $230M Net? what do these numbers mean? does this imply they have increased their CDS's or decreased them. very confusing!

Apr 22 04:39 PM

[guythomas:]

could mr Durden explain what my take away should be from this data? CDS's are not being generated because no on is borrowing? No one is lending? business is contracting and CD's are in low demand. Those de-risking are in in better shape than those Re-riskingtrouble? I look at GECC under deriskers, $70M gross $230M Net? what do these numbers mean? does this imply they have increased their CDS's or decreased them. very confusing!

Apr 22 04:39 PM