Global derivatives industry defends CDS after banking blow-ups

7:19 am Thursday, March 30th, 2023

By Marc Jones

LONDON (Reuters) – The derivatives industry body, the International Association of Swaps and Derivatives Association (ISDA), has backed Credit Default Swaps amid concerns about the role they have played in the recent bout of global banking turmoil.

Credit default swaps (CDS) are derivatives that offer insurance against the risk of a bond issuer – such as a bank – not paying their creditors.

European Union markets watchdog ESMA said on Thursday that it, together national regulators, had been “looking into the recent market movements, including in the CDS market”.

It followed comments earlier in the week from Andrea Enria, the supervisory chief at the European Central Bank, who highlighted the sharp volatility in Deutsche Bank’s CDS as its shares tumbled on Friday.

Far from being opaque, one of the criticisms levelled by Enria, ISDA’s Chief Executive Officer Scott O’Malia said regulators already had access to a extensive data showing, “who is trading what, when and in what size.”

Changes made after the 2008 financial crash mean that in 18 of the 20 top world economies all over-the-counter (OTC) derivatives – including “single-name” CDS as those for individual banks or firms are known – are now reported to regulators via so-called trade repositories.

“These rules mean single-name CDS, which play an important role in managing risk, are much more transparent,” Malia said.

In addition, the Depository Trust & Clearing Corporation’s (DTCC) Trade Information Warehouse – a centralized database that details virtually all cleared and bilateral CDS contracts – contains information for more than 50,000 accounts across 95 countries.

Clearing of individual bank or company CDS is also available at LCH’s CDSClear and ICE Clear Credit. For example, LCH offers clearing in over 300 European corporate names, including both Credit Suisse and Deutsche Bank, as well as other big lenders such as Barclays, BNP Paribas, and HSBC.

Overall, the credit derivatives market is also far smaller than it was before the 2008 crisis.

According to data from the Bank for International Settlements, the gross market exposure of credit derivatives was $247 billion at the end of June 2022 versus $5.4 trillion at the end of 2008.

“The credit derivatives market continues to play a critical role, particularly during times of volatility,” Malia said. “It enables firms to customize and hedge their exposure to individual credits or sectors.”

(Reporting by Marc Jones; Editing by Toby Chopra)