Friday, December 24, 2010
Clearing also results in the removal of redundant trades, since all participants face the clearinghouse — this is one of the advantages of the clearing model. With compression and clearing, as well as a more general decrease in volumes seen across the market over the last few years, the gross notional outstanding of CDS is now $26,000bn. This figure is current as of December 17, 2010 and weekly updates are publicly available from DTCC here. The table below breaks this number down further:
Single names are for CDS that reference a single entity, e.g. Spain or Banco Santander; indices are tradable products that reference a group of entities, e.g. Markit iTraxx Europe or Markit CDX.NA.IG; and tranches reference certain slices of those indices with different risk profiles. While some tranches are standardised, in that they have set structures with standard attachment and detachment points referencing standard indices such as the Markit iTraxx, other tranches are bespoke, which is to say that they were tailor made to a given client’s specifications.
An issue that deserves attention, which was also discussed in a note by Citi a couple of weeks ago, is that a lot of bespoke and standard tranches that were printed from 2005 and 2007 are still out there. Furthermore, they are being actively hedged...