DTCC just released the latest and greatest details on the CDS market's net and gross notional exposure and it makes for fascinating reading. Simplifying considerably, gross notionals somewhat represent activity and net notionals proxy exposure. We see gross IG9 index notionals (the index most at the centre of the JPM debacle) jumped but IG9 tranche gross notionals were steady; but net tranched credit notionals jumped and net untranched fell. This suggests an unwind of a delta-hedged tranche position with considerably more index impact than tranche impact - which smells just like what we think JPM was struggling with (and it appears is far from over). However, there was a huge jump in the number of trades done in the on-the-run index IG18 - last week was the most active of the year by far which fits with the surge in gross notional that we saw - as it would appear (as we noted previously) that the focus is now on using liquid indices to hedge whatever risk remains on JPM's book - which further helps to explain why IG18 has underperformed so much recently relative to HY credit and stocks.
IG9 net notionals for tranches rose while net index notionals fell in the last two weeks (suggesting the unwind of a hedged tranched credit position in size) - though note the minimal shift in index net notionals compared to the last few weeks (more to come - and remember this is aggregated across all maturities, not just 10Y)...
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but gross notionals are higher for both tranched and dramatically so for untranched IG9 as activity picked up...
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which is reflected in the fact that IG18 had its busiest week of the year - it is clear that the instrument of choice for hedging the hedge or reducing the risk is the on-the-run index...
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as gross notionals jumped dramatically for IG18...
and while IG9 is contonuing to underperform - especially post Dimon's admission call...
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it is clear that IG18 is suffering the most now as liquidity is coming at a premium for the bank to hedge its exposure...
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Data: CMA