Monday, December 28, 2009

CDS market is far less opaque than presumed

Letter to the Financial Times posted by Stewart Macbeth, Managing Director and General Manager, Trade Information Warehouse, DTCC:

Sir, Your article on sovereign credit default swaps, “CDS market needs reform if more drama is to be avoided” (December 18) erred when it said “nobody really knows exactly how low volumes are (or not) since this is an over-the-counter market, conducted away from any exchange”.

In fact, The Depository Trust & Clearing Corporation (DTCC) has brought an unparalleled level of transparency to the OTC derivatives market through its trade repository, the Trade Information Warehouse, which holds the underlying position data on virtually all credit default swap contracts traded globally. These data include figures on sovereign CDS contracts such as the Hellenic Republic that was referenced in your article.

Trades are currently fed into the Warehouse on a real-time basis by MarkitSERV, a joint servicing offering of DTCC and Markit Group Limited, which is used to confirm electronically more than 95 per cent of credit defaults traded globally, thus permitting the Warehouse to maintain real time position and turnover information for the entire market. Currently this information is published weekly on In addition, Warehouse information is provided separately to regulators worldwide, including the Financial Services Authority, the European Central Bank and the Federal Reserve. Our goal is to release publicly even more data and initiate daily reporting in 2010.

The value of the Warehouse was highlighted, following the Lehman bankruptcy in 2008, when rumours of $400bn in CDS exposure amplified stress in the financial markets. From our unique vantage point we were able to disclose that the market's exposure to Lehman would be closer to $6bn on a net basis. Ultimately, the trades were closed out at $5.2bn. We regret that the FT did not contact us or refer to our data tables prior to publishing their story, since we could have provided data addressing questions about the level of trading activity in sovereign CDS. The CDS market is far less opaque than the FT presumes, because there is a global trade repository supporting this asset class. If CDS trades were moved on to exchanges or CCPs and they did not report their data to a trade repository, the transparency that exists today would be lost.

As policymakers on both sides of the Atlantic take steps to increase regulatory oversight of the over-the-counter derivatives market, we urge them to consider the proven value of a single, central trade repository for each asset class, where both cleared and uncleared trades across the globe are registered.

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