An Analysis of CDS Transactions: Implications for Public Reporting

25 Pages Posted: 8 Oct 2011 Last revised: 18 Sep 2012

See all articles by Kathryn Chen

Kathryn Chen

Federal Reserve Banks - Federal Reserve Bank of New York

Michael J. Fleming

Federal Reserve Bank of New York

John P. Jackson

Bank of England

Ada Li

Federal Reserve Banks - Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Date Written: September 1, 2011

Abstract

Ongoing regulatory reform efforts aim to make the over-the-counter derivatives market more transparent by introducing public reporting of transaction-level information, including price and volume of trades. However, to date there has been a scarcity of data on the structure of trading in this market. This paper analyzes three months of global credit default swap (CDS) transactions and presents findings on the market composition, trading dynamics, and level of standardization. We find that trading activity in the CDS market is relatively low, with a majority of reference entities for single-name CDS trading less than once a day. We also find that a high proportion of CDS transactions conform to standardized contractual and trading conventions. Examining the dealer’s role as market maker, we find that large trades with customers are generally not rapidly offset by further trades in the same reference entity, suggesting that hedging of large positions, if taking place, occurs over a longer time horizon. Through our analysis, we provide a framework for regulators and policymakers to consider the design of the public reporting regime and the necessary improvements to data collection to facilitate meaningful price reporting for credit derivatives.

Keywords: block trade, clearing eligible, credit derivatives, dealer hedging, price reporting, public transparency

JEL Classification: G12, G18

Suggested Citation

Chen, Kathryn and Fleming, Michael J. and Jackson, John P. and Li, Ada and Sarkar, Asani, An Analysis of CDS Transactions: Implications for Public Reporting (September 1, 2011). FRB of New York Staff Report No. 517, Available at SSRN: https://ssrn.com/abstract=1938414 or http://dx.doi.org/10.2139/ssrn.1938414

Kathryn Chen

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Michael J. Fleming (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6372 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/fleming/

John P. Jackson

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ada Li

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Asani Sarkar

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

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