Continental AG And Brazil Lead Weekly Credit Default Swap Trading Volume

by: Donald van Deventer

Continental AG (OTCPK:CTTAY) was the most heavily traded corporate name in the single name CDS market this week, with a total of 236 contracts traded. The notional value of those contracts was slightly over $1 billion. Brazil led the sovereign rankings for the second consecutive week, with 830 contracts for $6.4 billion trading last week. The original source of the underlying data is the Depository Trust and Clearing Corporation, released Wednesday.

The purpose of this analysis is to bring greater transparency to the market for single name credit default swaps. We applaud the Depository Trust & Clearing Corporation for making available trading volume weekly since the week ended July 16, 2010. Most of the popular press and many data vendors report "CDS prices" without revealing the trading volume behind the "price," if any. For example, two vendors report daily CDS term structures out to 10 years or farther on 2,000 reference names. An analysis of the actual data, however, shows that 87% of the actual CDS trades from 2004 to 2012 were approximately 5 years in maturity. Moreover, during the 129 weeks ended December 30, 2012, the average number of reference names traded weekly was 875, not 2,000.

We now report the volume results for single name credit default swaps for last week. The table below shows the total number of contracts traded, the number of reference names traded, and the daily average number of trades per reference name using two methods:

"Daily average trades per reference name" includes all trades, including those between two "dealers" as defined by the DTCC. The "daily average non-dealer trades per reference name" excludes trades between dealers as an index of true "end user" demand. To do this calculation, we use the dealer-dealer trade percentage of 75.68%, the percent of trades in the DTCC trade warehouse on January 4, 2013.

The top ten reference names traded last week are reported here:

Sovereign names continue to dominate the trade volume rankings. On the corporate side, along with Continental AG, the top five names traded included Barrick Gold Corporation (NYSE:ABX), the Royal Bank of Scotland (OTC:RLSPY), Citigroup (NYSE:C), and Anglo American PLC (OTCPK:AAUKY):

The number of sub-sovereign or municipal trading volume continues to be minimal:

The final table shows the distribution of reference names by the number of contracts traded last week. The number of contracts traded is highly skewed with a small number of reference names experiencing trading volume of more than 100 gross contracts traded per week (that is, including dealer-dealer trades).

Past Trading Volume in Single Name Credit Default Swaps

In this section, we list studies of trading volume in the 129 weeks ended December 30, 2012.

All reference names

Sovereign CDS trading volume

Municipal CDS trading volume

U.S. bank reference names

International bank reference names

Non-bank corporate reference names

A review of historical trading volume should lead the careful analyst or trader to the conclusion that the market can be extremely thin and that one should not expect an easy exit from a position as credit insurance provider.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.