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Market Share, Profitability, Why CDS Isn't On An Exchange
From Peter Tchir of TF Market Advisors
Market Share, Profitability, Why CDS Isn't On An Exchange
So, yesterday it was revealed that both Goldman and JPM had about 145 billion of “gross” notional outstanding on CDS related to the PIIGS. That means they each had roughly 145 billion of purchases and sales. They spoke about various netting agreements that makes the real number lower. They also mentioned with collateral and on a mark to market basis, the real exposure is far lower. Fine, though I wonder why they don’t execute the “master” netting and get the gross notionals down? Wouldn’t that help the system? If these were cleared or on an exchange, all they would have a single net exposure for each country. The collateral and netting would be handled at the central clearing or exchange. Wouldn’t that be simpler? Safer? The e-mini S&P future contract seems to be able to trade that way just fine, and it is more volatile than CDS on most days. Italian CDS is in 25 bps today – seems like a lot, but the up-front payment to buy or sell Italian CDS has changed by less than 1%.
According to DTCC, these are the gross notionals outstanding for the 5 countries that were mentioned.
Country DTCC Gross Notional
Greece 70.4
Portugal 64.1
Ireland 44.3
Italy 317.5
Spain 162.1
So the total gross notional is 658 billion. That would mean that JPM and Goldman each have about 22% of the total gross notional outstanding. So almost half of the entire gross notional outstanding on PIIGS CDS sits on the books of 2 dealers. Why is there no rush to get these products cleared? It is now basically 4 years since Bear Stearns was bought with an immediate and non-cancellable guaranty of their derivative books. Recently BofA sought to move some of their trades to a different entity within their complex list of entities – presumably to enhance the counterparty exposure for some clients.
So gross notionals are a concern, counterparty is a concern, the trading is highly concentrated, and yet what limited effort has been made to clear these products properly has totally failed so far. There are some serious vested interests to protect.
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Because you can't trade the wind.
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How can you trade something that isn't worth anything ?
Trade it for some other worthless thing.
If ISDA (the big banks) just shot the euro-CDS market it would seem that these banks are net short on CDS', and hope to close the positions or reverse them for pennies on the dollar.
Question: Is it possible the TBTB might try to reverse their position as they crash in value and then force a default? If so, would they do this in unison or could some be expected to break ranks?
to me this total investment just went to zero.....no value...you sold nothing..you bought nothing....and the future..you will not be selling anymore either....wierd....
Was't their value just destroyed this morning? By their own governing (hah)agency?
greek cds unchanged today..no one really thought this was a Credit Event yet....it will be once they use CAC to force holders into PSI
+100. Exactly!
To whom will the TBTF banks now sell this crap? You have the right to collect, from a possibly bankrupt counterparty, insurance on securities which can be exchanged/subordinated/forceably altered with no legal recourse.
On top of it all, the credit event is determined by an ISDA committee of TBTF banks and other with vested interests.
I'd rather take my chances with the vacation insurance they sell on Priceline.
the federal reserve. aka our grand children
Buyers do not expect to collect a payout - the CDS are bought for accounting purposes. Having them `ballancing` a book of `assets` allows greater leverage because in theory counterparty risk is eliminated. It isn`t, but it looks like it is.
While this remains the case they will be traded. Some will trade them naked (without the underlying bonds) in expectation of higher premiums/greater conterparty risk perceptions.
It bollocks of course. And the reason they are not on an exchange? well I am shocked anybody needs to ask.........it would be way less profitable for the big players.
This does not surprise me considering the track record the TBTF banks have in development and sales of other financial products...it always ends up the same, they reap huge profits and the masses get fucked. What is remarkable is how TPTB have protected the TBTF Banks recently when you look at CDS, the Robosigning issues surrounding mortgages, and MFG. Where will it end? Here is a question for you...if the derivatives contracts in the market cannot be enforced, what is the next big product for the bookies, er, I mean banks, to use to reap huge financial paydays? What are Geithner and Bernanke going to do to prop up the dead whales?
"the CDS are bought for accounting purposes. Having them `ballancing` a book of `assets` allows greater leverage because in theory counterparty risk is eliminated. It isn`t, but it looks like it is."
I know this has been mentioned in passing before; if the CDS market becomes significantly 'impaired' due to ISDA not allowing them to be triggered--won't that impact their use as a leveraging tool for book assets? And if book assets shrink... won't that trigger margin calls? (Thinking MF Global here, but on a MUCH larger scale.)
CDS must have been thought up by Pinhead.
**added**
CDS = Cenobite Default Swap
CDS and most interest rate swaps are probably written and bought so that tax systems can be gamed as to where and when profits are earned. That is why banks claim to have net positions near zero and report total notional amounts outstanding that dwarf the underlying real markets.
Of couse even with a net zero position a bank is still exposed to huge liquidity and counterparty risks.
What is frustrating is that "half the notional outstanding" means little without the side of the trade.
If they are flat, then great. Good risk management.
If they are selling protection, CDS will likely not trigger.
Hard to believe as a dealer they are net buying protection, especially when they trumpet there is little exposure to the underlying at all.
Id bet they'd only go flat like JEF went after their EU exposures got to be the news of the days this summer.. Besides way too much profit available churning out the bonds day in day out, specially on a day when everything tightens across the board.
Thx.
The ultimate proof that non regulation is not a rule that should apply to TBTF entities.
Remember 1911 and anti-trust legislation and what that should have taught us. Of course Woodrow forgot it very conveniently in 1913; when he allowed a private banking scheme promoted by Warburg and Rothschilds with the US Oligarchs, Morgan and Rockafella, to make an alternative reserve currency base to UK £. The FED/USD were born.
---In the context of 1913 and imminence of Colonial war armageddon continent wide, it was understandable that the money line kings of Europe wanted to protect their riches by building the FED run USD safe-haven if Europe blew up; which it did, devaluing subsequently all three main Euro currencies, RM, Franc, £)---
We haven't learned the lessons of 1911, we went the other way in 1999 and repeal of G-S!
Now, unstructured collapse of the CDS market = Adios the TBTF cabal ! You head for nationalisation and Tombstone territory!
38T is no mean joke. If all naked OTC derivatives then get grilled, the banks LOSE their bread and butter on hot oligopoly toast! Man, its financial armageddon time!
Even Helicopter BEN and ECB Jerry will have a problem saving them!
Reality is just a word
until it hits your bank account or your car burglary.
These things will all just disappear in an "off-balance sheet" poof of smoke....
Ultimately everything will trade 'off' the exchanges...
Guys, isn't it obvious?
The banks are net short, if their is no event according to ISDA the CDS go to zero.
They won't be able to sell new CDS in the future, but this is about saving their ass now, hence the move in the banks of recent.
can you price CDS in olives?
The question I'd like answered is:
What is the point supposed to be of big banks buying and selling equal amounts of the same CDS? Isn't that like saying "we bet $100B on the Giants and $100B on the Pats in the Super Bowl?
Why?
Or do they buy at a discount and sell at a premium? If so, who are the dopes "wholesaling" CDS?
The bookie always lays offequal bets on each side...he makes his money on the vig...
ITEM: Don't trust people in vests. check.
http://homoclimbtastic.files.wordpress.com/2012/02/santorum-sweater-vest...
I think that JP Morgan has $79 TRILLIOn in derivatives exposure and BoA has $75 TRILLION.
http://www.bloomberg.com/news/2011-10-18/bofa-said-to-split-regulators-over-moving-merrill-derivatives-to-bank-unit.html
Bank of America’s holding company -- the parent of both the retail bank and the Merrill Lynch securities unit -- held almost $75 trillion of derivatives at the end of June, according to data compiled by the OCC. About $53 trillion, or 71 percent, were within Bank of America NA, according to the data, which represent the notional values of the trades.
That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.
Not sure how much of this is in Europe, but in the final analysis I dont think it really matters. When Euroep tanks its all shit in the wind anyway.
Gotta love Jamie Dimon, everyones favorite banker. He fucks over Citi and then leaves to run JPM where his risk taking mentality and love of derivatives may ultimately sink the biggest bank in the USofA. He should go the the head of the line when the ropes start hanging from the lamposts.
Guess who their counterparty is ... It starts with F E D
And there you have the magic words Tyler....'central clearing'.
The system will never work as long as prop desks can get around reporting their buys and sells....read Naked Shorting.
the way to clear up this crap is to simply change the definitions a bit.
No CDS that is Not Traded on an exchange with margin requirements can be considered as an offset or insurance hedge for a portfolio. It would have the effect of not outlawing these vehicles, but make the worthless when it comes to meeting the capital requirements related to debt classifications. If they have crap bonds, supposedly hedged to give a positive spread, they will have to hold the max capital against them, CDS or not.
Wall Street is so corrupted and the casino capitalism is totally rigged.
wtf?1
1: wtf? see ISDA
you're right,why relinquish control, while you can enjoy monopoly?
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