Use of Credit Default Swaps by Ucits Funds: Evidence from EU Regulatory Data

42 Pages Posted: 5 Nov 2020

See all articles by Achim Braunsteffer

Achim Braunsteffer

European Systemic Risk Board

Claudia Guagliano

European Securities and Markets Authority (ESMA)

Oisin Kenny

Central Bank of Ireland

Julien Mazzacurati

European Securities and Markets Authority

Date Written: June, 2019

Abstract

Using a sample of more than 18,000 Undertakings for Collective Investment in Transferable Securities,or UCITS, this paper aims to provide a first overview of the use of credit default swaps by EU UCITSfunds. We show that UCITS funds only account for a small share of the overall EU credit derivativesmarket. The CDS market is highly concentrated, with thirteen large dealers acting as counterparty to thevast majority of CDS transactions that involve UCITS funds. The use of CDS by UCITS is mainlyconcentrated in fixed-income funds and funds that rely on so-called alternative strategies. Funds that useCDS tend to be much larger on average. The analysis also reveals three salient features in the UCITSfunds’ use of CDS. Firstly, funds with directional strategies, such as fixed-income and allocation funds (ormixed funds), are on aggregate net sellers of CDS. Secondly, a large majority of CDS underlyings areindices, from which funds can gain exposure to multiple entities at once within one sector or region.Lastly, most sovereign single-name CDS are written on emerging market issuers, highlighting the rolethat these instruments can play in facilitating access to less liquid markets.

Keywords: credit default swaps, derivatives, investment funds, synthetic leverage

JEL Classification: F30, G10, G15, G23

Suggested Citation

Braunsteffer, Achim and Guagliano, Claudia and Kenny, Oisin and Mazzacurati, Julien, Use of Credit Default Swaps by Ucits Funds: Evidence from EU Regulatory Data (June, 2019). ESRB: Working Paper Series No. 2019/95, Available at SSRN: https://ssrn.com/abstract=3723457

Achim Braunsteffer

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Claudia Guagliano (Contact Author)

European Securities and Markets Authority (ESMA) ( email )

Paris, 75007
France

Oisin Kenny

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Julien Mazzacurati

European Securities and Markets Authority ( email )

103 Rue de Grenelle
Paris, 75007
France

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