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Latest DTCC CDS Update (Week Of August 28)
The summer doldrums had hit the CDS market hard last week, with a barely noticeable rerisking across industries, for a total of $21.8 billion decrease in net open interest, on 7,014 contracts. The action was asymmetric with just two sectors accounting for the bulk of the action: Basic Materials and Consumer Services, at $28.7 billion and $30.7 billion, respectively. These were offset by derisking primarily in Financials ($16.8 billion) and State Bodies ($11.7 billion).
Total gross outstanding increased slightly to $26.5 trillion, with $15.3 trillion in Single Names, $7.9 trillion in Indices and $3.2 trillion in Tranches.
In single name action, the leader in the derisking category was Morgan Stanley, raising questions whether credit once again knows something about adverse about John Mack's firm that equity players are not aware of (or at least were not prior to yesterday's beat down in financial names). The balance of the action was primarily rebalancing in sovereigns, where the action tends to be wild and crazy, many times in an effort to hedge open F/X positions.
On the rerisking side, a notable outlier was Banco Santander with a huge amount of over $1 billion in net notional change (almost $8 billion in gross), which likely was the net result of the Bank's repurchase of €16.5 billion in Securitized Bonds in the past week. The resulting action in synthetics was likely simply a way to hedge out risk coming from basis or index arb players.
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I've had a thought rolling around in my head for quite awhile, that the world is approaching Peak Speculation. The sheer amount of money and players involved in equities, debt, f/x, commodities etc all across the globe is astonishing. Everyone has money at risk through 401(k)s, pensions, endowments, life insurance policies etc. How many people day trade instead of producing something of real value? How many Chinese and Indian people are joining the game every day by pumping money into the casino? No matter how hard TPTB try to maintain the status quo there is only one direction to go once the peak is reached, down. You can't fight gravity.
This is exactly why there is more downside to come. Many wish to think that aside from this little detour we've had over the past few years, things are getting back to normal.
IMHO, there is an odor of panic in the air that if you don't hurry, you'll miss the next bubble. Classic sign of a herd mentality that will soon be crushed by reality. All it's going to take is a "correction" a bit deeper than is "expected" and people will rush for (or be pushed towards) the exits.
well, that's one scenario. however, don't underestimate the positive feedback mechanism generated by rising asset values. reality may as well lag pricing action.
Mos, are you suggesting we can't get rich and sustain a meaningful way of life by trading pieces of paper with one another? That's not what the people on TV said when they were referring to the "new economy." Someone might be taking liberties with the truth here.... <sarcasm bomb>
Derisking in MS?is that the next project for GS & JPM?!!!
Someone really needs to explain what desrisking and rerisking are....they are not common parlance in the cds market.
I am not a CDS guy, but this is my take. It means that banks are not writing new CDS's on MS. The underwriters are either buying back their issued CDSs or letting them expire rather than rolling them over. Thus not taking the risk that MS WILL default (de-risking against MS).
It's an insurance policy that they sell, so if a counterparty owns a CDS on MS and MS defaults that bank will have to pay that counterparty out. The peeps don't want to be doing that if the probability of default is high. I guess essentially there is no spread (or fee) high enough to get a bank to issue a CDS on MS.