• 23 Nov 2011 at 2:31 PM
  • CDS

The New York Fed Is Not Buying Any Crazy CDS Conspiracy Theories

I have a hazy memory of those exciting days in 2008 and 2009 when the world was going to be remade, shiny and new, with all of the risk gone from the financial system. The way we were going to get rid of all the risk, as I recall, was with the Volcker Rule and transparency around derivatives trading. That way, no shady prop trading of derivatives could blow up our financial system again, as long as you don’t think too hard about the word “again.”

Anyway, how’d it work out? Well, the New York Fed, who you’d think would have something to say about all of that, put up a note today about transparency in CDS trading. Their feelings about transparency in CDS trading can be summed up as “meh, we could take or leave transparency in CDS trading.” Specifically:

Data on trading activity in the CDS market paint a mixed picture of the likely impact of trade reporting rules. The high levels of standardization of trading and contractual terms are apt to enhance the ability of market participants and policymakers to interpret the reported transactions. However, the low frequency of trading diminishes the potential price discovery benefits of real-time trade reporting.

So real-time trade reporting won’t cause undue problems for dealers because most CDS is in fact a pretty standardized product that can be reported on a comparable basis. There’s “an impressively high level of standardization of contract terms and market conventions” in single-name CDS, including things like standardized coupons, payment dates, and the fact that “47 percent of single-name transactions and 84 percent of index trades … are in the five-year tenor.”

But no one will care about that reporting, because there just isn’t that much trading. This is based on a longer New York Fed paper from earlier this year, which we’ve mentioned before, but this graph is worthy of another look:

You could quibble with the data design (next graph I do will have three color-coded categories, “big numbers,” “medium numbers,” and “small numbers,” and they will be interspersed randomly across the graph!) but let. it. go. Instead let’s talk about the fact that for something like 1,200 of the 1,500-ish corporate CDS reference entities, the average trading frequency is less than once per day. Read more »