CDS Market Structure and Risk Flows: The Dutch Case

37 Pages Posted: 25 May 2018

See all articles by Anouk Levels

Anouk Levels

De Nederlandsche Bank

René van Stralen

De Nederlandsche Bank

Sînziana Kroon

De Nederlandsche Bank

Iman van Lelyveld

De Nederlandsche Bank; VU University Amsterdam

Date Written: May 18, 2018

Abstract

Using new regulatory data, this paper contributes to the growing literature on derivatives markets and (systemic) risk, by providing a first account of the Dutch CDS market, investigating the factors that drive buying and selling of credit protection ('flow-of risk'), and analysing the impact of Brexit. We find that the CDS market has a 'core-periphery' structure in which Dutch banks are CDS sellers while insurance firms and pension funds (ICPF's) and 'other financial institutions' (OFIs) are buyers. When the volatility of a reference entity increases, the propensity to sell CDS decreases for banks and increases for ICPFs and OFIs. This hints at procyclical behaviour by banks and countercyclical behaviour by ICPFs and OFIs. The 'core-periphery' structure of the CDS market became more pronounced around Brexit events, making the CDS market more vulnerable to shocks emanating from 'systemic' players. Banks reduced net buying and selling of CDS protection on UK reference entities, while OFIs and investment funds became more dominant. This underpins the importance of adequate buyers for systemic institutions and extending the regulatory perimeter beyond banking.

Keywords: EMIR, trade repositories, CDS markets, Brexit

JEL Classification: G15, G18

Suggested Citation

Levels, Anouk and van Stralen, René and Kroon Petrescu, Sînziana and van Lelyveld, Iman, CDS Market Structure and Risk Flows: The Dutch Case (May 18, 2018). De Nederlandsche Bank Working Paper No. 592, Available at SSRN: https://ssrn.com/abstract=3184307 or http://dx.doi.org/10.2139/ssrn.3184307

Anouk Levels (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

René Van Stralen

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Sînziana Kroon Petrescu

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Iman van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

VU University Amsterdam ( email )

Netherlands

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