On Tuesday, we looked at the volume of trading in sovereign credit default swaps by dealers and non-dealers as reported by the Depository Trust and Clearing Corporation. The surprising conclusion was that the 20 sovereign names on which trading was reported by DTCC had only 1-10 contracts traded daily by non-dealers. In today’s blog, we look at trading in the corporate names reported by DTCC.
As in Tuesday’s post, we analyze data on credit default swaps reported by the Depository Trust and Clearing Corporation on www.dtcc.com for the week of April 26-30, 2010. Our purpose is to get some feel for the depth of trading in corporate credit default swaps.
We again note this table, taken from www.dtcc.com, which shows a huge $14 trillion volume (notional principal, US dollar basis) in all credit default swap contracts during the week.
More than 2.1 million credit default swap contracts were traded. Of greater interest, however, is the fact that almost 1.8 million of these contracts were traded between dealers, 83.7% of the total number of trades. Only 16.3% of the trades, 351 thousand, were bought or sold by non-dealers. Our focus in this post is on the number of non-dealer trades in corporate credit default swaps on the theory that they are the true “end users” of credit default swaps in the long run.
As we reported on Tuesday, six firms in the United States represent 99.6% of all CDS trades outstanding. This proportion is based on data reported by the U.S. Office of the Comptroller of the Currency as of year end 2008. This confirms the very high degree of concentration among CDS dealers:
The raw data from DTCC reports on 222 reference names in which there were at least 50 new trades or assignments of existing credit default swap contracts on all entities traded during the week of April 26-30, 2010. Twenty of these entities were sovereigns and the rest were corporates.
In the following tables, we report the statistics reported on www.dtcc.com on the number of new CDS contracts traded for each of the 200 plus corporate names. We ignore assignments of existing contracts. We seek to answer this question: how much was the true demand by real non-dealer end users of credit default swaps on corporates? We can use the estimate from the full week of trading of CDS contracts reported by DTCC, in which 83.7% of all trading was dealer to dealer and 16.3% was by non-dealers, our true “end user” of the credit default swaps for corporates. We also apply the average notional amount on all CDS trades by non-dealers of $6.9 million per trade in a modified version of the table above. We present all corporates reported by DTCC in order of highest volume to lowest volume:
The low daily volume of trading by non-dealers is, as in the sovereign case, very surprising given the high level of prominence of credit default swaps in the financial press. In order to see daily trading volume by non-dealers more clearly, we use a histogram of daily average CDS trades by non-dealers.
130 of the 202 corporate reference names have an average of 5 or less trades per day by non-dealers. 149 reference names have 10 or less trades per day by non-dealers. Only two corporates have more than 40 trades per day by non-dealers. In tabular form, we report the distribution of average daily non-dealer CDS trades by number of reference names.
The table makes clear a very surprising fact. Of the almost 2,000 corporate reference names on which credit default swaps are traded, only 72 names had an estimated average of more than 5 trades per day by non-dealers according to the data reported by the Depository Trust and Clearing Corporation. Only 2 names had more than 40 trades per day.
The financial press has breathlessly lapped up stories about intra-day movements in credit default swaps as if the CDS market had the depth and breadth of trading in common stocks. Nothing could be farther from the truth. Among the data reported by DTCC, 83.7% of what small volume there is consists of dealer to dealer trades. The risks of collusion in such a tightly controlled oligopoly are very high, and figures quoted for corporate CDS levels have to be analyzed, as we said on Tuesday, with both hands on your wallet.
We close with this question for the Depository Trust and Clearing Corporation: Why have the designers of your web site consciously blocked the ability of users of the web site to cut and paste the volume statistics like those we report on today?
Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
May 13, 2010