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Jan 21

Written by: Donald van Deventer
1/21/2013 8:32 PM 

This blog is the last in a series analyzing the trading volume in single name credit default swaps for the 129 weeks ended December 30, 2012.  In this blog, we focus on trading in 946 non-bank corporate reference names.  We find that only one corporate averaged more than five non-dealer trades per day over the 129 week period studied.

In this blog, we analyze credit default swap trading volume for the 946 non-bank corporate reference names among the 1,130 reference names for which CDS trades were reported by the Depository Trust & Clearing Corporation during the 129 week period ending December 30, 2012. 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 January 4, 2013, dealer-dealer trading volume made up 75.68% 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:

  1. We divide each weekly number of trades by 5 to convert weekly trading volume to an average daily volume for that week.

  2. From that gross daily average number of trades, we classify 75.68% of trades as “dealer-dealer” trades, using the average “dealer-dealer” share of trades in the DTCC trade warehouse as of January 4, 2013.

  3. The remaining 24.32% is classified as daily average “non-dealer” volume, the focus of the reporting below.

Daily Non-Dealer Trading Volume for International Banking Reference Names

Of the 1,130 reference names for which DTCC reported credit default swap trades in the 129 week period ending December, 2012, 946 were non-bank corporations. We first analyze the 129 week averages for the 946 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:

  • 66.6% of the non-bank corporations had trading volume that averaged less than one non-dealer CDS contract per day over the 129 weeks ending December 30, 2012.

  • 91.8% of the non-bank corporations had trading volume that averaged less than two non-dealer CDS contracts per day over the 129 weeks ending December 30, 2012.

  • None of the 946 non-bank corporations had trading volume that averaged more than 8 non-dealer trades per day in the 129 weeks ended December 30, 2012.

  • The average number of non-dealer trades per day over the period studied was 0.69 trades.

  • The median number of non-dealer trades per day over the period studied was 0.53 trades.

We conclude that, like the 1,130 reference names overall, trading volume for the 946 non-bank corporations with CDS traded during the 129 weeks ending December 30, 2012 is minimal when analyzed on a non-dealer daily average basis.

Analyzing Trading Volume in Aggregate

We now analyze all 129 weeks of data, not just the average over that period, for all 946 non-bank corporations for which DTCC reported non-zero trade volume.  There were 122,034 = 946 x 129) observations on CDS trading volume for these non-bank corporations, and there were no trades for 26,988 observations, 22.1% of the total.  The distribution of non-dealer trades per day over these 122,034 observations is summarized in the following chart:

One can draw the following conclusions over 122,034 weekly observations:

  • 74.35% of the observations showed 1 non-dealer trade per day or less.

  • 98.38% of the observations showed 5 non-dealer trades per day or less.

  • 99.88% of the observations showed 10 non-dealer trades per day or less.

  • Only 0.12% of the observations were for more than 10 non-dealer trades per day.

  • The highest volume week featured 671 gross trades per week, 134.2 gross trades per day, and 32.6 average non-dealer trades per day. This volume was during the week ended September 30, 2011, during the run-up to the bankruptcy of Eastman Kodak on January 19, 2012.

As we stated above, this confirms that there is minimal trading volume in the 946 non-bank corporations on which CDS trades were reported by DTCC in the 129 weeks ended December 30, 2012.  The 25 non-bank corporates with the highest daily average non-dealer trading volume are listed here:

Weekly gross trading volume for Eastman Kodak is shown below:

Detailed Information on CDS Trading Volume by Individual Reference Name

Kamakura is pleased to provide the listing of trading volume by non-bank corporate reference name to those Kamakura clients and friends of the firm who e-mail info@kamakuraco.com and certify that they have read and agreed to the following DTCC terms of use agreement:

http://www.dtcc.com/products/consent.php?id=tiwd/products/derivserv/data/index.php

Donald R. van Deventer
Kamakura Corporation
Honolulu, January 22, 2013

© Donald R. van Deventer, 2013. All rights reserved

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