Trading volume in the bond and credit default swap markets is two of the key drivers of profit for major dealers like Bank of America (BAC), Barclays Bank PLC, BNP Paribas, Citigroup (C), Credit Suisse, Deutsche Bank, Goldman Sachs (GS), HSBC Holdings (HBC), JPMorgan Chase (JPM), Morgan Stanley (MS), The Royal Bank of Scotland Group PLC (RBS), and UBS AG (UBS). At the same time, these banks are commonly traded reference names in the single name credit default swap market. This is the fourth report in a semiannual series of reports on credit default swap trading in U.S. bank and bank holding company reference names. Prior reports from Kamakura Corporation were released on January 16, 2013, October 3, 2012, and January 10, 2012. A separate report on international banks is forthcoming. This updated report confirms the conclusions of the three prior reports: that there is trading only in the largest or most troubled bank holding companies in the United States and that the credit default swap market does not provide a credible basis for pricing deposit insurance of U.S. banks.
Using data reported by Depository Trust & Clearing Corporation during the 155 weeks ending June 28, 2013, there were credit default swaps traded on only 13 reference names among U.S. banking firms:
- Bank of America Corporation
- Morgan Stanley
- The Goldman Sachs Group, Inc.
- JPMorgan Chase & Co.
- Citigroup Inc.
- Wells Fargo & Co. (WFC)
- MetLife, Inc. (MET)
- Ally Financial, Inc.
- iStar Financial Inc. (SFI)
- American Express Company (AXP)
- Capital One Financial Corporation (COF)
- Capital One Bank (USA), National Association
- Citigroup Japan Holdings Corp.
There were no additions to this list since our previous update using data through December 30, 2012. These 13 reference names represent 11 consolidated corporations, four of which would not be considered banking firms by most observers prior to the recent credit crisis (American Express, Goldman Sachs, MetLife, and Morgan Stanley). During the 155 weeks of data on all live trades in the DTCC credit default swap trade warehouse, there were no trades on any of the other 6,048 banks insured by the FDIC in the United States as of March 31, 2013.
Credit default swap trading volume on the 13 firms listed above is based on data from the Depository Trust & Clearing Corporation and calculations by the Kamakura Corporation. We assume that each firm has a percentage of dealer-dealer trades equal to the 75.16% of all trades in the DTCC trade warehouse that were between dealers on July 5, 2013. The trading volume for the 13 reference names is summarized here:
There was an average of only 3.01 non-dealer credit default swap trades per day during the 155 weeks ended June 28, 2013 for the 13 banking entities listed above. None of the banks listed above averaged more than 6 non-dealer trades per day over the 155 week period studied. Six of the 11 firms listed are in a conflict of interest position as major dealers in the credit default swap market: Bank of America, Citigroup, JPMorgan Chase, Morgan Stanley, Goldman Sachs, and Wells Fargo. Dealer-dealer trades made up 75.16% of live trades in the DTCC as of July 5, 2013. The dealers would be setting deposit insurance rates for themselves if credit default swap pricing were used to determine FDIC insurance premiums.
There were 13 x 155 or 2,015 observations of credit default swap contract volume on U.S. banks. 151 of these observations, 7.5% of the total, were for zero contracts traded during the week. The largest single week of trading recorded was for 434 contracts, the equivalent of 21.6 non-dealer trades per day during that week. That volume was for Bank of America Corporation during the week ended October 22, 2010. The graph below shows weekly gross trading volume for Bank of America Corporation for the 155 weeks ended June 28, 2013:
Our conclusions from January 16, 2013 remain unchanged. Credit default swaps are not a practical basis for pricing bank deposit insurance for a number of reasons:
- The number of reference names traded over the 155 weeks ended June 28, 2013 is only 13, but 6,048 banks in the United States were insured by the FDIC as of March 31, 2013.
- Almost half of the reference names traded are major dealers in the credit default swap market, so they are in a conflict of interest position.
- There is a risk of collusion that is similar to the risks of collusion in the Libor market.
- Credit default swap pricing is affected by the probability of a bail-out of senior debt holders, so CDS pricing understates the true risk of failure for a bank that is "too big to fail."
Additional Information on CDS Trading Volume by Individual Reference Name
Additional disclosure: Kamakura Corporation has business relationships with a number of firms mentioned in this article.