In today's note, we look at 155 weeks of single name credit default swap trading volume data since the week ended July 16, 2010 through June 28, 2013 for 1,144 reference names. This analysis sheds light on the future volumes in the credit default swap market, which has been a major profit contributor for major dealers like:
- Bank of America (BAC)
- Barclays (BCS)
- BNP Paribas (OTC:BNPZY)
- Citigroup (C)
- Credit Suisse
- Deutsche Bank (DB)
- Goldman Sachs (GS)
- JPMorgan Chase (JPM)
- HSBC (HBC)
- Morgan Stanley (MS)
- Royal Bank of Scotland (RBS)
- UBS (UBS)
The credit default swap market has also played a complex role in the fortunes of these major corporate debt issuers, all of whom rank among the 25 most actively traded reference names over the last 3 years:
- MBIA Insurance Corporation unit of MBIA Inc. (MBI)
- Bank of America Corporation
- Morgan Stanley
- Eastman Kodak Company (EKDKQ.PK)
- General Electric Capital Corporation, the subsidiary of General Electric (GE)
- Banco Santander, S.A. (SAN)
- Radian Group, Inc. (RDN)
- Arcelormittal (MT)
- Goldman Sachs
- Clear Channel Communications, Inc. (CCO)
- J.C. Penney Company, Inc. (JCP)
This analysis focuses not only on the most heavily traded reference names but on all 1,144 reference names on which actual trades took place. We continue to find minimal "end user" trade volume for the overwhelming majority of those reference names.
In this note, we use the percentage of single name credit default swaps that was trading between two dealers, as defined by the Depository Trust & Clearing Corporation ("DTCC"). We use the recent percentage of dealer-dealer trades still open in the DTCC trade warehouse as of July 5, 2013: 75.16%. The definition of "dealer" used is that employed by DTCC.
We analyze CDS trading volume for the 1,144 reference names for which CDS trades were reported by DTCC during the 155 week period ended June 28, 2013. The weekly trade information is from the Section IV reports from DTCC. The data is described this way in the DTCC document "Explanation of Trade Information Warehouse Data" (May, 2011):
"Section IV (Weekly Transaction Activity) provides weekly activity where market participants were engaging in market risk transfer activity. The transaction types include new trades between two parties, a termination of an existing transaction, or the assignment of an existing transaction to a third party. Section IV excludes transactions which did not result in a change in the market risk position of the market participants, and are not market activity. For example, central counterparty clearing, and portfolio compression both terminate existing transactions and re-book new transactions or amend existing transactions. These transactions still maintain the same risk profile and consequently are not included as 'market risk transfer activity.'"
Our emphasis is not on gross trading volume. As mentioned above, dealer-dealer volume is 75.16% in the single name credit default swap market and it would be nearly costless for dealers to inflate gross trading volume by trading among themselves. Instead, we focus on "end user" trading where at least one of the parties to a trade is not a dealer. Accordingly, we make the following adjustments to the weekly number of trades reported by DTCC for each reference name:
- We divide each weekly number of trades by 5 to convert volume to an average daily volume for that week.
- From that gross daily average number of trades, we classify 75.16% of trades as "dealer-dealer" trades, using the July 5, 2013 "dealer-dealer" share of trades in the DTCC trade warehouse.
- The remaining 24.84% is classified as daily average "non-dealer" volume, the focus of the reporting below.
Daily Non-Dealer Trading Volume for 1,144 Reference Names
Before reporting on the 1,144 reference names in the DTCC warehouse, it is important to note a very important fact. Kamakura Risk Information Services' default probability service produces daily default probabilities on 32,511 public firms around the world, including 5,302 in the United States. The DTCC weekly reports were designed to report the top 1,000 reference names ranked by daily trading volume. In none of the 155 weeks, however, were there as many as 1,000 reference names reported by DTCC. In essence, the weekly reports contain every reference name in which there was non-dealer trading volume in the DTCC. For all other reference names, then, trading volume was zero. This means that more than 31,000 of the public firms in KRIS had zero credit default swap trading volume over the entire 155 week period studied. We now turn to the 1,144 reference names for which there was at least 1 credit default swap trade during the 155 week period.
We first analyzed daily average non-dealer CDS trading volume by calculating the daily average, as described above, for all 1,144 reference names for the entire 155 week period. The distribution of the reference names by non-dealer daily average trading volume contains some very surprising results:
Among the surprising conclusions are these facts:
- 69.7% of the reference names had 1 or fewer non-dealer contracts traded per day.
- 89.9% of reference names had 2 or fewer non-dealer contracts traded per day.
- 97.9% of reference names had 4 or fewer non-dealer contracts traded per day.
- Only 14 reference names averaged more than 5 non-dealer contracts traded per day.
- Only 4 reference names averaged more than 10 non-dealer contracts traded per day.
These trading volumes are miniscule to say the least, and it continues to be astonishing that financial journalists have not made the appropriate disclaimers when quoting "CDS prices" (many of which are quotes, not trades) for specific reference names. The most actively traded reference name was Spain, for whom gross weekly trading volume (including dealer-dealer trades) is graphed here:
The top 25 reference names by daily average non-dealer contracts traded during the 155 weeks ended June 28, 2013 are listed here:
The total number of contracts traded for all reference names has varied between 15,000 and 30,000 contracts per week for most of the 155 weeks ended June 28, 2013:
In order to better understand the data, we next analyzed each week of data for all 1,144 reference names. In aggregate, there should be 155 x 1,144 = 177,320 "reference name-weeks" of data reported, but there was no data reported on 43,315 occasions because there were no trades in that week for that reference name. Dividing these 43,315 observations by 1,144 reference names shows that, on average over the 155 week period, there were 38 weeks for each reference name in which there were zero CDS trades. The daily average non-dealer trade volumes for these 177,320 observations have the following distribution:
Again, this analysis allows us to draw some more surprising conclusions about all weekly trading in single name CDS for all 1,144 reference names, a total of 177,320 observations:
- 24.43% of the observations showed zero non-dealer daily average CDS trading
- 74.0% of the observations showed less than 1 daily average non-dealer CDS contract traded
- 87.13% of the observations showed less than 2 daily average non-dealer CDS contracts traded
- 98.22% of the observations showed less than 6 daily average non-dealer CDS contracts traded
- There were only 6 observations of the 177,320 where more than 45 daily average non-dealer CDS contracts traded
After reviewing the non-dealer trading volume reference name by reference name, we repeat the warning that we have posted in each semi-annual review of CDS trading volume: a sophisticated observer should assume that both traded CDS spreads and quoted spreads are highly likely to have been affected by collusion. Any other assumption could be hazardous to your wallet.