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 About Donald

Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Corporation
2222 Kalakaua Avenue

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Phone: 808.791.9888
Fax: 808.791.9898

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James McKeon
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Phone: 215.932.0312

Andrew Zippan
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Phone: 647.405.0895
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Clement Ooi
President, Asia Pacific Operations
Phone: +65.6818.6336

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Toshio Murate
Phone: +03.5778.7807

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This analysis is the third in a series analyzing the trading volume in single name credit default swaps for the 233 weeks ended December 26, 2014. In this note, we focus on trading in 1,041 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), Eastman Kodak Company (KODK), RadioShack(RSH), and Arcelormittal (MT).

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Trading volume in the bond and credit default swap markets, particularly the sovereign credit default swap market, is one of the key drivers of profit for major dealers like Bank of America (BAC), Barclays Bank PLC, BNP Paribas (BNPZY), Citigroup (C), Credit Suisse (CS), Deutsche Bank (DB), Goldman Sachs (GS), HSBC Holdings (HSBC), JPMorgan Chase (JPM), Morgan Stanley (MS), The Royal Bank of Scotland Group PLC (RBS), and UBS AG (UBS). This update adds some details to the nice Wall Street Journal study “Where did Europe’s Sovereign CDS Trading Go?” which analyzes the European Commission’s ban on the short sales of sovereign credit default swaps.

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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 233 weeks of single name credit default swap trading volume data from the week ended July 16, 2010 through December 26, 2014 for 1,239 reference names. In all there were 198,089 weekly observations in the data set for which there was at least 1 trade for that reference name.

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The Asian Institute of Chartered Bankers has just published “A Best Practice Approach to Modeling Sovereign Defaults” in the December 2014 issue of its Banking Insight magazine. Since the article, which I co-authored with my colleagues Suresh Sankaran and Dr. Clement Ooi, was targetted toward the Asia market, it is helpful to emphasize some of the most important points in modeling sovereign default risk from a world-wide perspective. There are three key points in modeling sovereign default risk that we explain in the rest of this article:

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The Federal Reserve’s 2015 Comprehensive Capital Analysis and Review stress testing exercise is moving toward its conclusion, but the biggest banks in the United States live in fear of delivering a “wrong answer” to the Federal Reserve. None of the big banks is immune from this fear, including the big four Bank of America (BAC), Citigroup (C), JPMorgan Chase (JPM), and Wells Fargo (WFC). In this note, we explain this fear and present a worked example of the right answer, a stress test using the Federal Reserve’s CCAR 2015 scenarios for an equal-weighted portfolio of loans to all public firms in North America. Along the way, we make suggestions about how to improve the CCAR stress testing process from the point of view of both the Federal Reserve and the banks that it regulates.

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