Credit derivatives traders cleared an increasing portion of contracts through central counterparties in the first half of the year, as the total market shrank, according to the Bank for International Settlements.
The share of outstanding contracts that traded through clearinghouses rose to 31 percent from 29 percent at the end of last year and less than 10 percent in 2010, BIS said in a report. The notional amount of cleared trades fell to $4.5 trillion as the market contracted to $15 trillion because of a reduction in inter-dealer activity, said the institution, which was formed in 1930 and acts as a central bank for the world’s monetary authorities.
Investors are routing trades through clearinghouses intended to curb risks in the financial system. Unlike contracts on credit-default swap indexes, most single-name trades have largely remained bilateral transactions, requiring higher capital charges under banking regulations and prompting dealers such as Deutsche Bank AG to pull back.
“There’s some hope that clearing more contracts will bring better liquidity to the market,” said Geraud Charpin, a portfolio manager at BlueBay Asset Management in London. “It would increase the willingness of investors to use credit-default swaps as an instrument and expand the investor base.”
Index trades are easier to clear because they’re more standardized and 39 percent of outstanding multi-name contracts went through central counterparties, compared with 24 percent for single-name swaps, BIS said.
Almost 90 percent of new index trades are cleared, according to Michael Hampden-Turner, a CDS specialist on the credit trading desk at HSBC Holdings Plc in London.
“There could be an overhang of old, legacy contracts that aren’t cleared that date from before the financial crisis in 2007 and aren’t traded anymore,” he said. “Once those illiquid contracts roll off, the share of swaps that clear will increase.”