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We previously analyzed the trading volume of credit default swaps on international bank reference names for the 233 weeks ending December 26, 2014. This note updates that analysis for the 259 weeks ended June 26, 2015. Of the 1,256 reference names on which credit default swaps were traded during this period, 114 were “international banks,” which we define as a non-U.S. financial institution. Out of the 216,056 observations reported by the Depository Trust & Clearing Corporation, there were 17,799 weekly observations in which an international bank had at least 1 credit default swap traded on its name.

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A number of authors have suggested that credit default swap pricing be used as a basis for setting deposit insurance premiums for banking firms or setting compensation for bank chief executive officers. We re-examine these proposals in this note, the seventh of a semiannual series of reports on credit default swap trading in U.S. bank and bank holding company reference names. This note updates the prior Kamakura Corporation report on credit default swap trading on U.S. banks for the 259 weeks ended December 26, 2015. 

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In this report, we update the semi-annual Kamakura Corporation analysis of trading volume in single name credit default swaps as reported by the DepositoryTrust & Clearing Corporation (“DTCC”). This report takes on special significance because of the increased activity in the courts regardingpotential collusion in the credit default swap marketand because ofGreece’s failure to pay on its borrowings from the International Monetary Fund.

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The author wishes to thank Prof. Robert Jarrow for many years of helpful conversations on this important topic. We thank the staff of Kamakura Risk Information Services for the 100,000 scenarios used in this study.

We use 100,000 scenarios for the U.S. Treasury (TLT) yield curve to examine the outlook for Treasuries and the magnitude of the term premium (or risk premium) above and beyond expected rate levels that is embedded in the yield curve. The U.S. Treasury yield curve from which simulations are initiated is the June 26, 2015 yield curve as reported by the U.S. Department of the Treasury.

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Regulatory risk regulations launched in the wake of the credit crisis emphasize the impact of a wide range of macro-economic factors on the risk of financial institutions. Over the past few years, it has become standard for regulators to use more realistic models of interest rate movements than common practice among large financial institutions. The 2010 market risk regulations of the Bank for International Settlements require “at least six factors,” and the Federal Reserve’s 2015 Comprehensive Capital Analysis and Review process specifies 3 U.S. Treasury factors for stress testing.

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