by Helen Cunningham
"The credit derivatives market has come a very long way: from completely opaque … to having a good deal of information publicly available, and a lot more besides that’s available to regulators,” according to a November 21 post on the Financial Times ft.com/alphaville blog.
The November 27 New York Times, writing that “Dodd-Frank sensibly asked that market participants provide trade and position details to regulators so this arena could be monitored better,” concluded: “That mission has pretty much been accomplished.”
The accomplishment is an industry milestone, attributable in large part to DTCC’s Trade Information Warehouse for over-the-counter (OTC) credit default swaps (CDS), a highly visible, global trillion-dollar market.
Ahead of the curve
“We built the Warehouse to collect and store information on credit derivatives more than five years ago, working closely with regulators and market participants with the goal of bringing transparency to the CDS market,” said Stewart Macbeth, president and CEO of DTCC Deriv/SERV LLC. “The industry had the jump on this objective well before the passage of Dodd-Frank,” Macbeth said. “It was actually back in 2006 that DTCC started working with the major dealers to populate the Warehouse with their outstanding books of business.” Today, because market participants feed their data into the Warehouse as a matter of course, the Warehouse contains more than 98% of all CDS trades executed in the global markets. “The availability of the data in one centralized location, along with its comprehensiveness, have brought increased transparency and risk mitigation to this important segment of the financial markets, supporting regulatory, legislative and industry objectives,” Macbeth said.
For the public and regulators
The Warehouse collects all relevant data on the OTC credit derivatives market and makes major slices of it available to the public at no charge on DTCC’s website. Today, more than 2,500 firms submit information to the Warehouse.
In addition to the public database, DTCC launched a portal specifically for global regulators in 2011. The portal helps regulators and other governmental entities monitor systemic risk by giving them the ability to view credit derivative exposures from a central vantage point. It provides direct access to the full range of data stored in the Warehouse, including counterparty names, aggregate and trade-level information, plus the ability to query position risk data. In addition to regulators and other governmental entities that rely on the data to manage systemic risk, the Warehouse’s public data is used by journalists, traders and structurers, economic and research analysts, legislators, academics and the public to gather and analyze information on credit derivatives.
Gross vs. net numbers
The Warehouse currently holds data on approximately 2.3 million contracts from trading counterparties around the world. The information includes both gross and net notional values, in U.S. dollar equivalents. Media coverage of the CDS markets indicates some confusion about the difference between these two measures, which can result in misleading reporting because the gross numbers are so much larger than the net numbers.
“The net notional numbers are a better indicator for market risk because they represent the maximum amount that would have to be paid if an entity defaults,” said Macbeth, adding that the calculation assumes netting across trade counterparties’ families.
The gross notional numbers are higher because they represent the value of all active CDS contracts, including offsetting contracts. In other words, even contracts that have cancelled each other out.
Take the case of data for the Republic of Italy as of Nov. 18, 2011. The gross notional value of active CDS contracts was $312.6 billion compared with a net notional value of $20.1 billion. Similarly, for General Electric Capital Corporation, the gross notional value of active CDS contracts was $95.4 billion compared with a net notional value of $11.2 billion.
Keeping legislators informed
To increase understanding of the OTC credit derivatives market among legislators in the U.S., Europe and Asia, DTCC also distributes a weekly email containing six tables based on data from the Warehouse.
The tables, based on net notional values, rank the top 15 sovereign reference entities and top 15 corporate entities by net notional values, as well as the top 10 sovereign and corporate volume movers in percentage terms for the previous week and previous four weeks.
“These tables are an example of taking key indicators from the Warehouse data and pushing them out to select constituents to promote greater understanding of the OTC derivatives markets,” said Macbeth. “In the case of legislators, we thought it was important to raise awareness of the industry’s success in promoting transparency via the data from the Warehouse that is freely available to the public on DTCC’s website.” @