On January 11, 2012, we looked at weekly credit default swap trading volume for sub-sovereigns and municipals among 1,090 reference names that had traded in the 77 weeks ended December 30, 2011. We found, unfortunately, that (in the words of Gertrude Stein) “there is no there there.” In this blog, we update our CDS volume analysis for sub-sovereigns and municipals for the 129 weeks ended December 30, 2012. Alas, our conclusion is unchanged.
In this blog, we analyze credit default swap trading volume for the municipal and sub-sovereign reference names among the 1,130 reference names for which CDS trades were reported by Depository Trust & Clearing Corporation (“DTCC”) 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.’”
As always, our emphasis is not on gross trading volume. As of January 4, 2013, dealer-dealer volume was 75.68% of the single name credit default swap market and 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. Accordingly, we make the following adjustments to the weekly number of trades reported by DTCC for each municipal and sub-sovereign reference name:
- We divide each weekly number of trades by 5 to convert weekly trading volume to an average daily volume for that week
- 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.
- The remaining 24.32% is classified as daily average “non-dealer” volume, the focus of the reporting below.
Daily Non-Dealer Trading Volume for Municipal and Sub-Sovereign Reference Names
Of the 1,130 reference names for which DTCC reported credit default swap trades in the 129 week period, only 9 were sub-sovereigns of any type:
HONG KONG SPECIAL ADMINISTRATIVE REGION
STATE OF CALIFORNIA
STATE OF FLORIDA
STATE OF ILLINOIS
STATE OF NEW JERSEY
STATE OF NEW YORK
STATE OF TEXAS
THE CITY OF NEW YORK
THE COMMONWEALTH OF MASSACHUSETTS
Between December 30, 2011 and December 30, 2012, no new names were added to this list. Eight of the 9 reference names were in the United States and 7 of the 9 reference names were U.S. states. The only cities on which credit default swaps had any trades in the 129 weeks ended December 30, 2012 were the City of New York and Hong Kong. We can summarize the trading volume in these 9 reference names as follows:
- There were 9 x 129 = 1,161 weekly observations, but there were no trades for 732 of the weekly observations. That means in 63% of the 129 weeks, on average, there would be no trades on these 9 reference names.
- The average number of non-dealer trades per day on all 9 reference names over the 129 week period was 0.23 trades per day.
- The median number of non-dealer trades per day over the 103 week period among the 9 reference names was 0.18 trades per day.
- The highest number of gross trades in one week was 173, which is the equivalent of 34.6 gross trades per day and 8.4 non-dealer trades per day. This data is for the State of California in the week ended September 21, 2012.
The following chart summarizes trading volume by the nine reference names:
Week by week gross trading volume for the State of California over the full 129 week period ending December 30, 2012 is given in this chart:
Among the 1,130 reference names traded during the 129 week period, the muni market volume leader, the State of California, ranked only 688th.
Detailed Information on CDS Trading Volume by Individual Reference Name
Donald R. van Deventer
Honolulu, January 16, 2013