This note is the last in a series analyzing the trading volume in single name credit default swaps for the 155 weeks ended June 28, 2013. In this analysis, we focus on trading in 961 non-bank corporate reference names. We find that only one non-bank corporation averaged more than five non-dealer trades per day over the 155 week period studied.
The ten most heavily traded non-bank corporate reference names over the period ended June 28, 2013 were led by MBIA Insurance Corporation:
- MBIA INSURANCE CORPORATION [Subsidiary of MBIA Inc. (MBI)]
- EASTMAN KODAK COMPANY (EKDKQ.PK)
- GENERAL ELECTRIC CAPITAL CORPORATION [Subsidiary of General Electric (GE)]
- RADIAN GROUP INC. (RDN)
- ARCELORMITTAL (MT)
- CLEAR CHANNEL COMMUNICATIONS, INC. [Subsidiary of Clear Channel Outdoor Holdings, Inc. (CCO)]
- J. C. PENNEY COMPANY, INC. (JCP)
- SPRINT NEXTEL CORPORATION (S)
- TELECOM ITALIA SPA (TI)
- THE PMI GROUP, INC. (PMI)
The conclusions of this study have major implications for the profitability of the major credit default swap dealers and their ability to tie loan and bond pricing to credit default swap quotes and traded levels. The major single name credit default swap dealers include the following firms:
- Bank of America (BAC)
- Barclays (BCS)
- BNP Paribas (OTC:BNPZY)
- Citigroup (C)
- Credit Suisse (CS)
- Deutsche Bank (DB)
- Goldman Sachs (GS)
- JPMorgan Chase (JPM)
- HSBC (HBC)
- Morgan Stanley (MS)
- Royal Bank of Scotland (RBS)
- UBS (UBS)
In this note, we analyze credit default swap trading volume for the 961 non-bank corporate reference names among the 1,144 reference names for which CDS trades were reported by the Depository Trust & Clearing Corporation during the 155 week period ending 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.'"
We again confirm that our emphasis is not on gross trading volume. As of July 5, 2013, dealer-dealer trading volume made up 75.16% of all single name credit default swaps that were live in the DTCC trade warehouse at that point in time. 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, as defined by the DTCC. Accordingly, we make the following adjustments to the weekly number of trades reported by DTCC for each non-bank corporate 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 as of July 05, 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 Non-Bank Corporate Reference Names
Of the 1,144 reference names for which DTCC reported credit default swap trades in the 155 week period ending June 28, 2013, 961 were non-bank corporations. We first analyze the 155 week averages for the 961 non-bank corporations. 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:
- 70.9% of the non-bank corporations had trading volume that averaged less than one non-dealer CDS contract per day over the 155 weeks ending June 28, 2013.
- 92.8% of the non-bank corporations had trading volume that averaged less than two non-dealer CDS contracts per day over the 155 weeks ending June 28, 2013.
- None of the 961 non-bank corporations had trading volume that averaged more than 8 non-dealer trades per day in the 155 weeks ended June 28, 2013.
- The average number of non-dealer trades per day over the period studied was 0.79 trades.
- The median number of non-dealer trades per day over the period studied was 0.54 trades.
We conclude that, like the 1,144 reference names overall, trading volume for the 961 non-bank corporations with CDS traded during the 155 weeks ending June 28, 2013 is minimal when analyzed on a non-dealer daily average basis.
Analyzing Trading Volume in Aggregate
We now analyze all 155 weeks of data, not just the average over that period, for all 961 non-bank corporations for which DTCC reported non-zero trade volume. There were 148,955 = 961 x 155 observations on CDS trading volume for these non-bank corporations, and there were no trades for 36,012 observations, 24.2% of the total. The distribution of non-dealer trades per day over these 148,955 observations is summarized in the following chart:
One can draw the following conclusions over 148,955 weekly observations:
- 75.17% of the observations showed 1 non-dealer trade per day or less.
- 98.30% of the observations showed 5 non-dealer trades per day or less.
- 99.85% of the observations showed 10 non-dealer trades per day or less.
- Only 0.15% of the observations were for more than 10 non-dealer trades per day.
- The highest volume week featured 959 gross trades per week, 191.8 gross trades per day, and 47.6 average non-dealer trades per day. This volume was during the week ended May 10, 2013 for MBIA Insurance Corporation.
As we stated above, this confirms that there is minimal trading volume in the 961 non-bank corporations on which CDS trades were reported by DTCC in the 155 weeks ended June 28, 2013. The 25 non-bank corporates with the highest daily average non-dealer trading volume are listed here:
Weekly gross trading volume for MBIA Insurance Corporation is shown below:
Detailed 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.