Trading volume in the bond and credit default swap markets, particularly the sovereign credit default swap market, is one of the key drivers of profit for major dealers like Bank of America (NYSE:BAC), Barclays Bank PLC (NYSE:BCS), BNP Paribas (OTC:BNPZY), Citigroup (NYSE:C), Credit Suisse, Deutsche Bank, Goldman Sachs (NYSE:GS), HSBC Holdings, JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), The Royal Bank of Scotland Group PLC (NYSE:RBS), and UBS AG (UBS). The liquidity of the sovereign credit default swap market is also critical to exchange traded sovereign debt funds (NYSEARCA:PCY) and U.S. Treasury funds (NYSEARCA:TLT), (NYSEARCA:TBT), (NYSEARCA:SHY). On July 19, 2013, Kamakura Corporation reviewed trading volume in credit default swaps for 1,144 reference names reported by the Depository Trust & Clearing Corporation and found that only 4 reference names in the world had averaged more than 10 non-dealer trades per day in the 155 weeks ended on June 28, 2013. In this note, we look at weekly credit default swap trading volume for sovereigns among those 1,144 reference names. This report is an update of the Kamakura sovereign credit default swap trading volume analysis of January 15, 2013. We continue to find that a small set of sovereigns leads trading volume in single name credit default swaps: Spain, Italy, France and Brazil. Beyond those names, trading volume drops off rapidly.
The weekly trade information we analyze 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."
As discussed in the July 19 report, our emphasis is not on gross trading volume. As of July 5, 2013, 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 sovereign reference name:
- We divide each weekly number of trades by 5 to convert weekly trading 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 average "dealer-dealer" share of trades in the DTCC trade warehouse on July 5, 2013.
- The remaining 24.84% is classified as daily average "non-dealer" volume, the focus of the reporting below.
Daily Non-Dealer Trading Volume for Sovereign Reference Names
Of the 1,144 reference names for which DTCC reported credit default swap trades in the 155 week period, only 58 were sovereigns:
ARAB REPUBLIC OF EGYPT
BOLIVARIAN REPUBLIC OF VENEZUELA
COMMONWEALTH OF AUSTRALIA
FEDERAL REPUBLIC OF GERMANY
FEDERATIVE REPUBLIC OF BRAZIL
KINGDOM OF BELGIUM
KINGDOM OF DENMARK
KINGDOM OF NORWAY
KINGDOM OF SAUDI ARABIA
KINGDOM OF SPAIN
KINGDOM OF SWEDEN
KINGDOM OF THAILAND
KINGDOM OF THE NETHERLANDS
PEOPLE'S REPUBLIC OF CHINA
REPUBLIC OF AUSTRIA
REPUBLIC OF BULGARIA
REPUBLIC OF CHILE
REPUBLIC OF COLOMBIA
REPUBLIC OF CROATIA
REPUBLIC OF CYPRUS
REPUBLIC OF ESTONIA
REPUBLIC OF FINLAND
REPUBLIC OF HUNGARY
REPUBLIC OF ICELAND
REPUBLIC OF INDONESIA
REPUBLIC OF ITALY
REPUBLIC OF KAZAKHSTAN
REPUBLIC OF KOREA
REPUBLIC OF LATVIA
REPUBLIC OF LITHUANIA
REPUBLIC OF PANAMA
REPUBLIC OF PERU
REPUBLIC OF POLAND
REPUBLIC OF SLOVENIA
REPUBLIC OF SOUTH AFRICA
REPUBLIC OF THE PHILIPPINES
REPUBLIC OF TURKEY
SOCIALIST REPUBLIC OF VIETNAM
STATE OF ISRAEL
STATE OF QATAR
UNITED KINGDOM OF GREAT BRITAIN AND NORTHERN IRELAND
UNITED MEXICAN STATES
UNITED STATES OF AMERICA
No credit default swap trades were reported in the 155 weeks ending June 28, 2013 for the other 126 sovereigns that have default probabilities in Kamakura Risk Information Services sovereign default service.
Analysis of Daily Average Non-Dealer Trades Per Day
We first analyze the 155 week averages for the 58 sovereigns for which CDS trading volume was greater than zero during the 155 weeks ending June 28, 2013. The daily average non-dealer trading volume, calculated as described above, was distributed as follows:
The conclusions that can be drawn from this table are summarized here:
- 44.8% of the 58 sovereigns averaged less than one non-dealer CDS trade per day
- 84.5% of the 58 sovereigns averaged less than six non-dealer CDS trades per day
- The remaining 9 sovereigns had the 9 of the 10 highest levels of non-dealer CDS trades per day of the 1,144 reference names reported by DTCC. We report those figures below.
- The average 155 week daily average number of non-dealer trades per day for the 58 sovereigns was 2.76 trades per day
- The median 155 week daily average number of non-dealer trades per day was 1.21 trades per day for the United States of America
We conclude that trading volume for the most active sovereigns is higher than it is for the most active corporations, which is only logical given that such sovereigns issue more debt than the most active corporations. The correlation between trading volume and debt outstanding is weak, however, with the United States well down on the ranking of trade volume in spite of the high volume of U.S. debt outstanding. Gross weekly contracts traded on the United States of America peak near dates where debt outstanding approached the legislative ceiling imposed by Congress:
Analyzing Trading Volume in Aggregate
We now analyze all 155 weeks of data, not just the average over that period, for all 58 sovereigns for which DTCC reported non-zero trade volume. There were 8,990 (= 58 x 155) observations on CDS trading volume for these 58 sovereigns, and there were no trades during 787 observations, 8.8% of the total. The distribution of non-dealer trades per day over these 8,990 observations is summarized in the following chart:
One can draw the following conclusions over 8,990 weekly observations:
- 50.91% of the observations showed 1 non-dealer trade per day or less
- 86.51% of the observations showed 6 non-dealer trades per day or less
- 93.92% of the observations showed 10 non-dealer trades per day or less
- Only 0.55% of the observations were for more than 25 non-dealer trades per day
- The highest volume week featured 1,444 gross trades per week, 288.8 gross daily average trades, and 71.7 average non-dealer trades per day.
- Just 4 sovereigns account for 31.1% of the total trading volume in credit default swaps over the 155 week period ending June 28, 2013.
While the sovereign CDS market shows more non-dealer CDS daily average volume than the corporate market, trading is concentrated in a relatively few names and 126 sovereigns had no CDS trades at all over the 155 week period studied.
Detailed Information on CDS Trading Volume by Individual Reference Name
The weekly, daily, and daily non-dealer trading volume for the top 35 sovereign names is given here:
Additional disclosure: Kamakura Corporation has business relationships with a number of the firms mentioned in this article