CDS Market Is Shrinking

Credit Default Swap [CDS] dealers have reduced outstanding contracts for the first time since 2001 (see Bloomberg article).

The volume of trades globally fell to $54.6 trillion from $62 trillion, according to the International Swaps and Derivatives Association. Traders are unwinding trades and protecting against losses as the U.S. credit markets continue to struggle. Currently, 17 banks handle about 90 percent of trading in credit derivatives. At the request of the Federal Reserve Bank, these individual banks have begun tearing up trades that offset each other in an effort to help reduce the day-to-day payments, paperwork, and potential errors, further reducing the amount of capital that commercial banks are required to hold against the trades on their books.

It is unclear how many offsetting trades are left, and what level of counterparty exposure that will remain once the tearing up of trades completes.

Disclosure: None

Comments

[investor88:]

CDS is an area worth monitoring as it could impact financial markets in times of stress. The risk in CDS markets could be high but there is no transparency.

2008 Sep 28 03:07 AM

[Rumpole:]

Will the $700 bilion bailout allow parties whose CDS obligations have been triggered by any of the BSC, WAMU, AIG, LEH or other failures to dump these obligations onto the taxpayer?? If so, then I guess Paulson's successor will likely be back before congress begging for more money, but this time will likely be prostraterather than just on one knee!

2008 Sep 28 02:31 PM