There were small [losses] in the first quarter, but real ones that we talked about the $2 billion were all in the second quarter. And it kind of grew as the quarter went on.
That’s JPMorgan’s chief executive Jamie Dimon, in the conference call arranged after the bank’s 10-Q revealed substantial losses in a synthetic credit portfolio held by its Chief Investment Office. Read more
“The question is,” said Alice, “whether you can make words mean so many different things.”
In a recent Alphaville post, I made the claim that if the monolines had been required to mark the credit risk that they had taken to market, they would not have played such a prominent role in the financial crisis. Here I want to provide some support for that claim. Read more
In the space of less than a year, the headline in the International Financing Review went from “Quanto CDS flows return” to “Dealers hope for the death of quanto CDS“.
What gives? Read more
“Over time we’ve seen a secular increase in the use of CDS and a decrease in the use of bonds as a trading tool,” he said. “Last year we saw bonds being placed at new issue more as a buy-and-hold investment as fund managers found their ability to trade out of bond positions in secondary markets much more limited.”
That’s Niall Cameron, the global head of credit trading at HSBC, being quoted by Chris Whittall of IFR. The article provides anecdotal evidence that actual clients (non-dealers) might be getting more involved in the market lately. Like so: Read more
Depending on which way you want to look at it, over-the-counter derivatives either increased or decreased in size, as of mid-2011.
That’s according to Bank for International Settlements statistics that were released back in mid-November. Further discussion of the results came out on Monday as part of the BIS’s bigger quarterly review though. Read more
Investors paid record amounts to protect themselves against the risk of default by Bank of America on Wednesday, as fears grow over US banks’ exposure to the eurozone debt crisis, says the FT. Credit default swaps on BofA rose as high as 495 basis points, according to Markit, compared with the previous high of 456bp on October 4 and a recent low of 300bp in late October. In early October, the cost of default protection on US banks had surged to levels not seen since the period around the 2008-09 financial crisis. There were other signs of stress in the US financial sector this week, with the three-month dollar Libor rising to its highest rate since July 2010, and the two-year interest rate swap spreads reaching their highest level since May 2010. CDS protection on European financials also rose to fresh highs on Wednesday, with Italian banks among the hardest hit. Read more
Ok, who moved first?? Was it you, bond yield? Or was it you, CDS spread? It was you, wasn’t it.. Quick, shoot the messenger! Get him!!!
Maybe that’s not exactly what’s happening in the discussion of the transition mechanism between CDS spreads and bond yields. But the topic has become so politicised it can sometimes seem that the angry villagers are on a rampage. Read more
The cost of buying insurance against a default by the US rose to a record on Wednesday, the FT reports, in a sign of growing unease that gridlock in Washington over raising the federal debt ceiling may result in the Treasury failing to pay interest to bondholders. Premiums for one-year US sovereign CDS rose sharply this week and traded at about 90 basis points in London on Wednesday, overtaking the previous high set in March 2009. The market for buying and selling insurance on the creditworthiness of the US is thinly traded, denominated in euros and dominated by European and UK banks in London. But trading in CDS has picked up as the threat of a default has grown. Read more
Attention over-the-counter (OTC) energy traders who think there’s no prominent high frequency trading (HFT) presence in their section of the market.
A Tabb Group research piece on how HFT practices are likely to creep into credit default and interest rate swaps once the market becomes centrally cleared, automated and standardised has made a striking discovery over the course of its data gathering. Read more
Readers are at this point excused a slight sense of déjà vu…
We know that trading in CDS index options is getting bigger and bigger. Investors want to bet on volatility of protection levels on credits, not just the protection itself. It’s a logical evolution.
How big on a particular day though? Read more
Why they’ll extend private Greek debt maturities — in two charts:
So bad a mess even the hedging looks bust.
Quite apart from threatening to overturn the foundation-stone financial hierarchy of debt over equity… Read more
Friday’s stunning announcement from the EU Commission below:
The European Commission has opened two antitrust investigations concerning the Credit Default Swaps market. CDS are financial instruments meant to protect investors in the event a company or State they have invested in default on their payments. They are also used as speculative tools. In the first case, the Commission will examine whether 16 investment banks and Markit, the leading provider of financial information in the CDS market, have colluded and/or may hold and abuse a dominant position in order to control the financial information on CDS. If proven such behaviour would be a violation of EU antitrust rules. In the second case, the Commission opened proceedings against 9 of the banks and ICE Clear Europe, the leading clearing house for CDS. Here, the Commission will investigate in particular whether the preferential tariffs granted by ICE to the 9 banks have the effect of locking them in the ICE system to the detriment of competitors. Read more
So what’s up with Banco Popolare and Monte Dei Paschi Di Siena?
We ask, because credit default swaps on these two Italian banks’ subordinated debt have recently rocketed off from their peers. Read more
Some proof of hedging following the Dodd-Frank sledging.
Bloomberg reported an interesting CDS tidbit this morning: Read more
Memo to financial regulators who want to ban or limit CDS:
Fitch Solutions finds that the liquidity of a sovereign’s credit default swap (CDS) is highly correlated with the level of the underlying bond yield. Where sovereign CDS liquidity is high, bond yields tend to fall, thus reducing the cost of funding for sovereigns. Conversely, bond yields increase when liquidity in the CDS market falls off. Liquid CDS markets provide investors with the ability to hedge higher risk debt, thus playing an important factor in driving demand for the underlying cash instruments. Read more
Financial derivatives that are widely tracked as a measure of creditworthiness of companies and countries have in many cases been poor indicators of default in the financial crisis, says Fitch Ratings, reports the FT. The findings of the Fitch study highlight how privately-traded credit default swaps, where even the most actively traded contracts change hands only a few times per day, are influenced by many factors beyond the fundamental credit positions of companies or countries concerned. These include the numbers of buyers and sellers, the amount of borrowings that traders can access and overall risk appetite. This may limit the usefulness of CDS prices, or spreads, for measuring default risk. Read more
Markit credit analyst Lisa Pollack explores the intricacies of CDS credit events
Before the “Big Bang” in the credit default swap (CDS) market in the spring of 2009, if you thought a credit event had occurred, you actually had to refer back to one of the annexes in the 2003 ISDA Definitions and complete a Credit Event Notice for your counterparty, submitting publicly available information to support your case. For each credit auction, one had to sign up to individual protocols that governed each specific one. Read more
Here’s a post-crisis financial milestone to ponder on Wednesday, courtesy of some fresh data on banking activity from the Bank for International Settlements.
As the BIS comments (emphasis ours): Read more
Here is an arresting graphic (click to enlarge):
CDS markets are looking up lately — well, if you’re an emerging sovereign:
Markit’s Gavan Nolan wrote this piece
EDHEC-Risk, a unit of the France-based business school, on Thursday released a withering criticism of Germany’s unilateral ban on naked short selling of eurozone debt.
We quote: Read more
Germany’s midnight move to ban naked shorting hasn’t quite led to an outbreak of European unity, it’s safe to say — with France lining up to attack first.
As Reuters reports, French economy minister Christine Lagarde is none too happy: Read more
Germany on Tuesday temporarily banned short selling of debt issued by eurozone countries, according to a statement by the country’s financial services regulator. BaFin cited “extraordinary volatility in debt securities issued by eurozone countries” in its rationale for the move. The ban also extends to so-called ‘naked CDS’ on eurozone debt, and to naked short sales of the shares in ten financial institutions, including Deutsche Bank, Allianz and Commerzbank. The announcement saw the euro slip 1.6 per cent to a fresh 4-year low of $1.2162. Read more
Here’s the FT Alphaville translation of the statement by the German financial regulator on its move to temporarily ban certain naked shorts:
The Federal Financial Supervisory Authority has on Tuesday temporarily banned naked short sales of debt securities issued by eurozone countries for trading on domestic stock exchanges in the regulated market. It has also temporarily banned so-called credit default swaps (CDS) where the reference bond and liability are from a eurozone country, and which does not serve to hedge against default risk (naked CDS). Read more
Moody’s Market Implied Ratings group — not the be confused with the ratings division — last week published some research into the reaction (or lack thereof) of the CDS investors to European banks’ “likely exposures to Greek obligations.” According to MIR, investors might soon wake up to the realities of these exposures – and European bank CDS could suffer as a result. Read more
CDS liquidity is suddenly on the rise somewhere in developed markets, Fitch said on Wednesday, using its, er, unique liquidity scoring.
(The lower Fitch’s score, the more liquid contracts on a given reference entity are, which, according to Fitch, indicates greater uncertainty over credit risk.) Read more