Credit Defualt Swaps are Down for the Week
Does this mean the CDS market is beginning to unwind. Hard to tell, but at least we are headed in the correct direction. From Market Watch:
In another sign Wall Street is still in cash-raising mode, outstanding credit-default swaps fell last week, suggesting holders of these derivatives have been unwinding positions faster than they are putting on new ones, according to Barclays Capital.
The gross notional value of outstanding swaps, or the sum of all contracts bought or sold, fell 2.6%, or $866 billion, to $32.7 trillion, in the week ended Nov. 7, the Depository Trust & Clearing Corporation reported on its Web site earlier this week.
Net notional values outstanding fell 1.6%, or $49 billion, to $2.96 trillion.
The decline in net notional value "signals that customers are unwinding positions at a faster pace than they are putting on new ones," said Barclays Capital analyst Roger Freeman in a note to investors Friday.
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Net notional balances, as opposed to gross balances, cancel out transactions that offset each other. For instance, if an investment bank buys $100 million in credit-default swaps to protect against a company default and sells $50 million of swaps for protection on the same company, the net notional value would be $50 million.
Unwinding their positions "could be driven by profit-taking, exiting trades to free up capital or a lack of interest in the market," Freeman wrote.
It was the second week DTCC, a clearing house for securities and over-the-counter derivatives, has published such information. The move followed calls for increased transparency into the vast but until recently obscure swaps market.
Buyers of credit-default swaps get, for a fee, protection against the risk that a company or even country will renege on its debt. The market ballooned in recent years as buyers, including many large financial institutions, looked to hedge credit exposure.
But fallout from the U.S. housing-market collapse exposed deep problems in the way credit-default swaps, or CDS's, are traded and settled.
AIG, one of the biggest dealers of CDS protection, was forced into what's become a $150 billion U.S. government bailout after buyers of its credit protection demanded more collateral to cover the possibility it would fail to make good on its contracts.
The Bush administration said Thursday that it was working on establishing central counterparties for credit-default swaps, some of which are to be in place before year-end.
"A well-regulated and prudently managed CDS central counterparty can provide immediate benefits to the market by reducing the systemic risk associated with counterparty credit exposures," according to the President's Working Group on Financial Markets, which includes Treasury Secretary Henry Paulson, Securities and Exchange Commission Chairman Christopher Cox and Federal Reserve Chairman Ben Bernanke.
Observers have said the existence of a central clearing party, which could have stepped in if it looked as if a large swaps player was about to renege on its contracts, would have helped prevent some of the shocks stemming from the collapse of Bear Stearns and Lehman Brothers this year.