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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. We re-examine this proposal in this note, the sixth 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 181 weeks ended December 27, 2013. We find that MBIA Insurance Corporation and Bank of America Corporation were the institutions traded most heavily in the credit default swap market over the 2010 to 2014 period.

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We previously analyzed the trading volume of credit default swaps on international bank reference names on February 11, 2014 for the 181 weeks ending December 27, 2013. This note updates that analysis for the 207 weeks ended June 27, 2014. Of the 1,206 reference names on which credit default swaps were traded during this period, 111 were “international banks,” which we define as a non-U.S. financial institution. Out of the 177,974 observations reported by the Depository Trust & Clearing Corporation, there were 14,737 weekly observations in which an international bank had at least 1 credit default swap traded on its name.

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Kamakura Corporation projections for U.S. Treasuries and fixed rate mortgages this week show that the implied forward yields for 15 year fixed rate mortgages rise from a current effective yield of 3.327% (up 0.035% from last week) to 5.602% in 10 years, up 0.064% from last week. This rise came about despite the sharp fall in U.S. Treasury forward rates. The all-in yield on 30 year fixed rate mortgages rose 0.047% from last week. Up-front points rose on both 15 and 30 year fixed rate mortgages this week, contributing to the rise in all-in costs. The value of net servicing for both 15 and 30 year fixed rate mortgages fell relative to last week, dropping 0.04% and 0.14% respectively. Mortgages tend to react with an erratic lag to changes in Treasury market conditions.

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This analysis is the second in a series analyzing the trading volume in single name credit default swaps for the 207 weeks ended June 27, 2014. In this note, we focus on trading in 1,011 non-bank corporate reference names. The highest non-dealer trading volumes are found on “story credits” like J. C. Penney (JCP), Caesars Entertainment Operating Company, Inc. (CZR), Arcelormittal (MT), General Electric Capital Corporation (GE), and Telecom Italia S.p.A. (TI).

Conclusions: We find that only five corporates averaged five or more non-dealer trades per day over the 207 week period studied. We conclude that corporate credit default swaps are potentially subject to manipulation and collusion, as recent lawsuits allege. For analytical reasons as well, we believe that default probability models which use CDS quotes, un-weighted by trading volume, are problematic.

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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 Depository Trust & Clearing Corporation (“DTCC”). In today’s analysis, we look at 207 weeks of single name credit default swap trading volume data from the week ended July 16, 2010 through June 27, 2014 for 1,206 reference names. In all there were 177,974 weekly observations in the data set for which there was at least 1 trade for that reference name.

Conclusion: We continue to find minimal “end user” trade volume for the overwhelming majority of the reference names. The exception is the trading of credit default swaps on sovereign reference names. The lack of volume in the single name credit default swap market has important implications for the profitability of dealers like JPMorgan Chase & Co. (JPM), Goldman Sachs (GS), Citigroup Inc. (C), Morgan Stanley (MS), and many other very large financial institutions.

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