Credit Suisse, Goldman Said Mulling Plan to Promote CDS Clearing

  • Moves come amid industry push to revive shrinking market
  • Settling trades through clearinghouses can lower bank costs

Two of Wall Street’s biggest credit-default swaps dealers are considering plans that could help revive trading in a key part of the market -- just as an increase in corporate failures boosts demand for loss insurance.

Credit Suisse Group AG and Goldman Sachs Group Inc. may offer better pricing to clients that agree to settle their transactions through a clearinghouse, which can lower the cost of the trades for the banks, according to people with knowledge of the discussions. Because post-crisis regulations have left the clearing option voluntary in that part of the market, investors have had few incentives to change practice. That’s caused dealers to increasingly pull back, with Deutsche Bank AG saying last year that it would exit most of the so-called single-name market.

“We needed something that starts driving the market toward clearing, and that will help with liquidity,” said Peter Tchir, head of macro strategy at Brean Capital LLC and a former credit-derivatives trader. “This is a step toward getting some more contracts cleared.”

The moves by the dealers, which they are making separately, come amid a broader industry push to jump-start a market that’s shrunk 59 percent since the 2008 financial crisis. Some of the biggest swaps investors, including BlackRock Inc., have been pushing for greater standardization after Deutsche Bank said stricter post-crisis regulations made the business less profitable. Net wagers using single-name swaps -- once the biggest part of the market -- have dropped to $646 billion from $1.59 trillion in October 2008, according to Depository Trust & Clearing Corp. data.

As part of the changes, the banks are looking to offer a narrower gap between the price at which they agree to sell credit insurance and where they’ll buy it -- a difference known as the bid-ask spread. The wider the spread, the harder it is for investors to trade the contracts, and ultimately profit from the trades. In other words, those who agree to work through a clearinghouse would be given better pricing than investors that keep the trade as a bilateral transaction between themselves and the banks. Clearinghouses, which are mandated for use in the larger market tied to indexes, are intended to prevent a cascade of losses were one large counterparty to fail.

Credit Suisse could start offering different pricing for cleared and uncleared swaps as early as January, said the people, who asked not to be named because the discussions are private.

Drew Benson, a spokesman for Credit Suisse in New York, and Michael DuVally of Goldman Sachs, declined to comment.

Banks are being required to hold more capital backing their trades after regulators blamed the credit swaps market for exacerbating the 2008 crisis by allowing investors to amplify bets on debt while spreading the risks across the globe. Investors including BlackRock have been leading a push to get more money management firms to commit to voluntarily clearing credit-swaps contracts.

Earlier this year, Markit Ltd., which administers the Markit CDX North American High Yield Index, worked with credit swaps traders to overhaul rules for the gauge to bring it more in line with the underlying bond market it’s supposed to track. The move was also intended to help boost swaps trading in some of the most active debt issuers.

In July, the International Swaps and Derivatives Association recommended a semi-annual roll of swaps contracts, replacing the existing convention of four times a year. That step was taken to improve liquidity and help increase clearing of eligible single-name swaps.

Before it's here, it's on the Bloomberg Terminal.