Killing My CDS Softly

The global trading in Credit-default Swaps continues to slowly decline, the latest quantitative analysis from Fitch Ratings shows. Investors are pulling out of the euro zone, out of the financial sector and out of the credit markets across all sectors.

“Average global CDS liquidity continues to reflect a high degree of CDS market uncertainty, particularly in Europe.”

Fitch Ratings

“Global CDS liquidity levels continued to trend in line with the previous two weeks – reflecting a high degree of CDS market uncertainty, particularly within Europe. A combination of market worries surrounding both the outcome of the Greece bailout and elections in the UK, as well as continued euro zone sovereign debt pressures and new banking regulations for the US financial industry continued to weigh on credit markets across all sectors,” Fitch writes.

“CDS on financial institutions and sovereigns appear to be trading with the most liquidity. Digging deeper, it is apparent that of the 25 most liquid financials, 23 are domiciled in North America with the remaining two in Europe,” the rating agency points out.


“The Security and Exchange Commission’s lawsuit against Goldman Sachs & Co. in addition to ongoing debates in the Senate over the proposed financial regulations bill, have contributed to renewed uncertainty within the credit  markets over the US financials industry.”

“Liquidity for CDS referencing Goldman Sachs & Co., Morgan Stanley, JPMorgan Chase & Co., Bank of America Corporation and Citigroup Inc. increased during the month to 7 May.”

Speculators Moving East

“CDS referencing Brazil, Mexico and South Korea are trading with the most liquidity with Peru and Russia rounding out the top five. CDS on sovereigns in South‐East Asia underwent a surge in liquidity in April as Vietnam, Malaysia and Thailand all moved up 25, 21 and 15 global percentile rankings respectively. Meanwhile CDS on troubled European sovereigns, namely Greece, Portugal, Spain and Ireland, has fallen since early April.”

“The decline in liquidity may be indicative of investor uncertainty about current pricing amid the volatile spread levels at which CDS on these countries are currently pricing.”

In other words: French president Nicolas Sarkozy seem to have succeeded in scaring the speculators out of Europe.

There is however a downside; they are taking their money with them.

And this might cause even more problems for the financial sector that is most depending on insuring their debt with CDS contracts.

The Risk Is Still Out There

In the U.S. Citigroup  remains the only bank on the top 10 most‐liquid list.

Telecommunications companies account for four of the five most‐liquid reference entities in Europe as competitive pressures continue to weigh on the sector.

South Korean financial institutions continue to dominate CDS liquidity in the Asia‐ Pacific region. However, liquidity on Japanese financial institutions Orix Corporation, Promise Co., Ltd. and Sanyo Shinpan Finance Co., Ltd. — which had been trading with much liquidity in previous months  – fell sharply during the month.

There were big increases in CDS liquidity in April for South Korean electronic giants Samsung Electronics Co., Ltd. and LG Electronics, according to Fitch Ratings.

The World’s Most Popular Debt Bet

Still, on global scale, CDS on Bank of America is at the moment the most traded.

CDS on Wells Fargo are trading in the second –  Goldman Sachs and Morgan Stanley in the third.

CDS written on Banco Santander continue to trade with more liquidity than any other bank in Europe, followed by Lloyds TSB Bank of the UK and Bank VTB (JSC) of Russia.

Meanwhile, as clean‐up efforts continue in the Gulf of Mexico after an oil rig accident attributed to BP CDS liquidity on European oil and gas companies moved up. Liquidity for OMV AG, Repsol YPF and BP plc increased most, according to the Fitch research.

In general, the liquidity of a credit derivative asset increases when it is showing signs of financial stress in combination with a significant amount of debt outstanding and/or changes in its capital structure, including new issuance.

The liquidity scores of assets have historically traded between 4 at the most liquid end, through to 29 at the least liquid end.

Here’s a copy of the latest CDS report from Fitch.

Related bt The Swapper:

Europe To Fight Speculators With “Secret Plan”

Will The Goldman-Case Kill The OTC Market?

Fitch: The Long-Term Goldman-Effect

Euro Area Under Massive Speculative Attack

E.U. Prepared To Set Up Own Rating Agency

Naked self-interest

ECB Makes Rating Agencies Irrelevant

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