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.
Conclusion: We confirm our earlier results that there is minimal end-user trading in single name credit default swaps on the international banking sector. In fact, the highest daily average non-dealer trade count was only 5.11 trades, for Banco Santander, S. A. As noted in our credit default swap study for U.S. banks dated February 11, 2014, the low volume of trading in financial institutions credit default swaps makes credit default swap “prices” unsuitable for the pricing of deposit insurance because of analytical difficulties, lack of sufficient data, risk of manipulation, and conflict of interest for those banks who are also dealers in credit default swaps.
We analyze credit default swap trading volume for the non-U.S. banking firm reference names among the 1,206 reference names for which CDS trades were reported by the Depository Trust & Clearing Corporation during the 207 week period ending June 27, 2014. 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 10, 2014, dealer-dealer trading volume made up 72.48% 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-U.S. banking 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 72.48% of trades as “dealer-dealer” trades, using the average “dealer-dealer” share of trades in the DTCC trade warehouse as of January 10, 2014.
- The remaining 27.52% is classified as daily average “non-dealer” volume, the focus of the reporting below.
Important note: the trading averages for each reference name are reported only for those weeks in which there were trades. In other words, the averages are conditional on trades taking place.
Daily Non-Dealer Trading Volume for International Banking Reference Names
Of the 1,206 reference names for which DTCC reported credit default swap trades in the 207 week period ending June 27, 2014, 111 were non-U.S. banking firms. The top 10 in trading volume are listed here:
- BANCO SANTANDER, S.A. (SAN)
- LLOYDS BANK PLC (LYG)
- BANCO BILBAO VIZCAYA ARGENTARIA, SOCIEDAD ANONIMA (BBVA)
- INTESA SANPAOLO SPA (IITOF.PK)
- COMMERZBANK AKTIENGESELLSCHAFT (CRZBY.PK)
- THE ROYAL BANK OF SCOTLAND PUBLIC LIMITED COMPANY (RBS)
- UNICREDIT, SOCIETA PER AZIONI (UNCFY.OB)
- DEUTSCHE BANK AKTIENGESELLSCHAFT (DB)
- BARCLAYS BANK PLC (BCS)
- CREDIT AGRICOLE SA (CRARY.PK)
Analysis of Daily Average Non-Dealer Trades Per Day
We first analyze the weekly averages for the 111 non-U.S. banking firms for which CDS trading volume was greater than zero during the 207 weeks ending June 27, 2014. The daily average non-dealer trading volume, calculated as described above and averaged over 207 weeks for each firm, was distributed as follows:
The conclusions that can be drawn from this chart are summarized here:
- 75% of the 111 international banks had trading volume that averaged less than 1.10 non-dealer CDS contract per day over the 207 weeks ending June 27, 2014.
- 95% of the 111 international banks had trading volume that averaged less than 4.05 non-dealer CDS contracts per day over the 207 weeks ending June 27, 2014.
- 99% of the 111 international banks had trading volume that averaged less than 4.37 non-dealer CDS contracts per day over the 207 weeks ending June 27, 2014.
- None of the 111 international banks had trading volume that averaged more than 6 non-dealer trades per day in the 207 weeks ended June 27, 2014.
- The average number of non-dealer trades per day over the period studied was 0.97 trades.
- The median number of non-dealer trades per day over the period studied was 0.46 trades.
We conclude that, like the 1,206 reference names overall, trading volume for the 111 international banks with CDS traded during the 207 weeks ending June 27, 2014 is minimal when analyzed on a non-dealer daily average basis.
Analyzing Trading Volume in Aggregate
We now analyze all 207 weeks of data, not just the average over that period, for all 111 international banks for which DTCC reported non-zero trade volume. There were 22,977 = 111 x 207 potential observations on CDS trading volume for these 111 banks, and there were no trades for 8,240 observations, 35.9% of the total. The distribution of non-dealer trades per day over these 14,737 non-zero observations is summarized in the following chart:
One can draw the following conclusions over 14,737 non-zero weekly observations:
- 75% of the observations showed 1.49 non-dealer trade per day or less.
- 95% of the observations showed 5.34 non-dealer trades per day or less.
- 99% of the observations showed 9.63 non-dealer trades per day or less.
- The highest volume week featured 23.39 average non-dealer trades per day.
As we stated above, this confirms that there is minimal trading volume in the 111 international banks on which CDS trades were reported by DTCC in the 207 weeks ended June 27, 2014.
Detailed Information on CDS Trading Volume by Individual Reference Name
The 25 international banks with the highest trading volume over the period studied are listed in the following table. Banco Santander, S.A. leads the trading volume ranking with 5.11 non-dealer trades per day:
The graph below shows the weekly gross number of contracts traded over the full 207 week period for Banco Santander S.A., which ranked 21st among all 1,206 reference names for which DTCC reported one or more CDS trades:
The gross U.S. dollar equivalent notional principal on Banco Santander S.A. is summarized in this chart:
We conclude that single name credit default swap trading on non-U.S. banks shares a lot with the London Interbank Offered Rate: a high risk of collusion and price manipulation. For that and the other reasons cited above, any “quotes” on credit default swap levels for international banks cannot be taken seriously unless the volume of actual trades associated with the “quotes” is made clear. If there are no trades associated with the quote, the parallels with “Liebor” become even stronger.
Donald R. van Deventer
Honolulu, July 10, 2014