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CDS market copes with summer spike in trade volume
Tue Oct 30, 2007 4:56pm GMT
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LONDON, Oct 30 (Reuters) - The market for credit derivatives swaps (CDS) successfully withstood a jump in trading volumes when the credit crisis struck in the third quarter, an industry consultant said.
"There was a big spike in volumes in the last three or four months," Jonathan Davies, co-chief executive officer of Derivatives Consulting Group, told reporters on Tuesday. "Systems were tested strongly, and we have seen their ability to cope with these volumes."
The average of 18 global banks' monthly trading in CDS rose to highs of about 23,000 deals in July, more than 25,000 in August and 20,000 in September, according to data from Markit. That compared with about 12,000, 10,000 and 11,000 for the same three months of 2006.
Davies said banks had improved CDS processing significantly in the past two years. "If the credit crunch had hit two years ago, it would have been far, far worse."
Markit figures showed that outstanding confirmations aged over 30 days in the banks rose to more than 3,000 over the summer from a low of below 1,000 in late 2006, but the number was still less than the roughly 7,000 in September 2005.
In August 2005 after backlogs between CDS trade and settlement became as long as 90 days, the New York Federal Reserve called 14 major dealers to a meeting on market operations. This led to an agreed protocol and a centralized depository and clearing to confirm CDS trades.
Banks, meanwhile, have sought to improve efficiency of back office operations to help keep up profitability as CDS instruments have matured and become more standardized, which has squeezed bank margins on each trade.
CDS are contracts that shift default risk between two investors or allow them to make bets on the direction of the credit markets. One side of a CDS contract pays an annual fee to buy protection against default, while the seller of protection promises to cover losses in the event of a default.
Many investors turned to the CDS market to hedge or make bets on spreads during the summer, while they lost confidence in more complicated, tranched credit products.
Over the past two years, bank back offices have been the driving forces for standardization in the CDS industry, Davies said.
He spoke at a presentation hosted by T-Zero, a company that is automating one step of the trading process by providing a system for market players to affirm trades electronically, aiming to reduce errors and disagreements at settlement.
The company claims to have about 142 existing clients and another 140 coming onto its platform out of the roughly 1,000 institutions in the market.
"The trick is to get more people using it," said Andrew Longmuir, a vice president of credit markets technology at JPMorgan Chase. "We simply need more adoption across the industry."
Now that efficiency has improved in the credit derivatives market, back offices are shifting focus to the equity derivatives market to clear up operational issues there, Davies said.
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Tue Oct 30, 2007 4:56pm GMT
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LONDON, Oct 30 (Reuters) - The market for credit derivatives swaps (CDS) successfully withstood a jump in trading volumes when the credit crisis struck in the third quarter, an industry consultant said.
"There was a big spike in volumes in the last three or four months," Jonathan Davies, co-chief executive officer of Derivatives Consulting Group, told reporters on Tuesday. "Systems were tested strongly, and we have seen their ability to cope with these volumes."
The average of 18 global banks' monthly trading in CDS rose to highs of about 23,000 deals in July, more than 25,000 in August and 20,000 in September, according to data from Markit. That compared with about 12,000, 10,000 and 11,000 for the same three months of 2006.
Davies said banks had improved CDS processing significantly in the past two years. "If the credit crunch had hit two years ago, it would have been far, far worse."
Markit figures showed that outstanding confirmations aged over 30 days in the banks rose to more than 3,000 over the summer from a low of below 1,000 in late 2006, but the number was still less than the roughly 7,000 in September 2005.
In August 2005 after backlogs between CDS trade and settlement became as long as 90 days, the New York Federal Reserve called 14 major dealers to a meeting on market operations. This led to an agreed protocol and a centralized depository and clearing to confirm CDS trades.
Banks, meanwhile, have sought to improve efficiency of back office operations to help keep up profitability as CDS instruments have matured and become more standardized, which has squeezed bank margins on each trade.
CDS are contracts that shift default risk between two investors or allow them to make bets on the direction of the credit markets. One side of a CDS contract pays an annual fee to buy protection against default, while the seller of protection promises to cover losses in the event of a default.
Many investors turned to the CDS market to hedge or make bets on spreads during the summer, while they lost confidence in more complicated, tranched credit products.
Over the past two years, bank back offices have been the driving forces for standardization in the CDS industry, Davies said.
He spoke at a presentation hosted by T-Zero, a company that is automating one step of the trading process by providing a system for market players to affirm trades electronically, aiming to reduce errors and disagreements at settlement.
The company claims to have about 142 existing clients and another 140 coming onto its platform out of the roughly 1,000 institutions in the market.
"The trick is to get more people using it," said Andrew Longmuir, a vice president of credit markets technology at JPMorgan Chase. "We simply need more adoption across the industry."
Now that efficiency has improved in the credit derivatives market, back offices are shifting focus to the equity derivatives market to clear up operational issues there, Davies said.
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