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Developments in the Credit Default Swap (CDS) market have been few and far between in recent years, with the market no longer attracting the headlines it once did prior to the Global Financial Crisis1. An event almost as rare as the blooming of the Amorphophallus titanum2 has recently occurred, a new CDS Index has been launched.
On Monday, 13th April, a new CDS Index referencing North American Financial Institutions was launched3; however, the focus is somewhat different to iTraxx Senior and Sub Financials (which are likely to be more familiar with most readers).
This new index includes 25 North American entities, split between regional banks, insurers, and business development companies. The key difference compared to its European cousin(s) is the exclusion of major global systemically important banks (GSIBs)4.
This distinction is important, as it changes the dynamic of what is on offer. Business development companies typically invest in private companies5, and for this reason, some are citing this index as a way to gain exposure to the private credit markets6. To provide context, it is worth briefly explaining what a CDS Index is, starting by considering a ‘basic’ single name CDS.
Having established what the launch of this index means, we can now turn to the numbers. For this analysis, we will use transactional data reported via DTCC, published under CFTC part 43 (real-time swap reporting) .
Whilst it is not dissimilar to European MiFID legislation, it captures a far wider range of contracts, making it more suitable for our use case.
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From Chart 1, the first observation is a significant outlier on the left showing ‘CDS Idx Swt’. This refers to Swaption contracts (options on swaps) on CDS indices. The next category ends in ‘Tra’, which is short for tranche and refers to a tranche of a CDS index.
We will not go into every category, as most are not relevant for the purposes of this analysis. However, it is worth highlighting the third category, ending in ‘SN’, which stands for ‘Single Name’, i.e. a standard CDS contract on a single legal entity. One key (intentional) omission from the above is a bar for Index CDS, which is by far the most liquid category.
Switching focus to Index CDS, the chart again appears highly skewed, with the major liquid contracts taking the lion’s share of the volume.
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Chart 2 splits out the various Corporate Index CDS contracts (Sovereign CDS Indices also exist). From this, it is clear that the major contracts make up the vast majority of the volume. Hence, from right to left, what do these represent?
The new index highlighted at the start of the article, CDX.FINANCIALS, was not widely traded in the first two weeks. We will now look into the day-by-day flows.
We finish up this week by examining the new contract and analysing the daily flows.
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The new contract is in its infancy and the data tells us that flows so far have been fairly light. At the time of writing, only 19 transactions and USD 740 million notional volume have been reported (and only the 5 year contract trading, which is typically the most liquid tenor for CDS).
On the launch day, nearly half the flow and number of trades (9 in total) were observed, followed by a decline to a far less frequent trend, with trades not occurring on every day.
Whilst there is currently limited data available for this new contract, it is apparent that CFTC part 43 ensures CDS data is increasingly available. Propellant Digital clients will soon be able to take advantage of a global CDS view, incorporating not only DTCC data, but CDS data reported via the FCA and ESMA under MiFID reporting rules.
Although the FCA has not yet confirmed the introduction of an OTC derivatives consolidated tape, ESMA has initiated its tender process, with a potential launch as early as next year. Hence, one thing is clear: transparency on CDS is only set to improve.
1https://www.imf.org/external/pubs/ft/wp/2010/wp1044.pdf
2https://arboretum.harvard.edu/frequently-asked-questions-about-the-titan-arum-or-corpse-flower/
5https://www.investopedia.com/terms/b/bdc.asp
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