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Banking Relations

ISDA: Credit-Default-Swap Market Activity Has Stabilized

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November 06, 2019

Accounting with BenjaminsCorporate treasuries using the credit-default swap (CDS) market to monitor the credit risk of financial counterparties and potentially large customers and vendors can take comfort in a recent study showing that the derivative market provides valuable insight into at least 500 names.

The International Swaps and Derivatives Association (ISDA) identified 1,284 unique reference entities, typically banks, corporates and nation-states, that underlay CDS contracts over the last 22-quarter period. More than 500 of those names generated market risk transfer activity (MRTA) each quarter over that time. MRTA, according to an ISDA spokesperson, covers transactions that change the risk positions between two parties, including new transactions, termination of existing transactions, or assignment of existing transactions to a third party.

“MRTA is indicative of trading volume and if there is more trading in CDS, it’s more likely that spreads would be reflective of the market’s views on the credit risk of a reference entity,” the spokesperson said.

Major bank CDS among the most active. The study, released in September, revealed that “market activity in single-name CDS has been stable since 2016,” although it notes that a relatively small number of reference entities account for a large portion of the transactions. The report lists 27 names that account for about 45% of total, single-name CDS MRTA. Several of those reference entities are global banks, including Banco Santander, Bank of America, Barclays, Deutsche Bank, Morgan Stanley, Societe Generale and Goldman Sachs.

  • Most large corporates seek to include JPMorgan Chase & Co. and Bank of America among their relationship banks. Top investment banks such as Goldman Sachs and Morgan Stanley are also significant counterparties, so tracking their credit standing is critical and the CDS market provides a more timely view than the rating agencies.
  • That’s especially important for some European banks, such as Barclays, Deutsche Bank and Italy’s Intesa Sanpaolo, that have had to deal with a struggling European economy, negative interest rates, and in some cases a series of scandals.

Three corporates make the list. Three corporates were among the 27 reference entities with the most active CDS: Arcelor Mittal, the world’s largest steel production company, Telecom Italia SPA and Spain’s Telefonica SA. Each carry ratings that are borderline investment grade or non-investment grade.

The remaining reference entities are nation-states, which ISDA declined to name.

Using data from the Depository Trust & Clearing Corp. Trade Information Warehouse, ISDA concludes that single-name CDS market activity has stabilized over the last 31/2 years, and MRTA on a four-quarter rolling average basis ranged between $600 billion and $700 billion. ISDA notes that both corporate and sovereign single-name CDS market activity has remained relatively flat since 2016.

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