Net Notional

One of the more useful information items in Goldman's periodic filings is granular disclosure on the firm's CDS holdings, and specifically segregated data by maturity bucket and by spread as pertains to "maximum payout and notional amount of written credit derivatives." In essence, due to the firm's monopoly in CDS inventory and, therefore, trading, this is the squid's beating heart: between buying and selling (hopefully offsetting positions) CDS in billions of dollars worth of notional daily, and being able to capitalize on wide spreads, courtesy of the extinction of such traditional competitors as Bear and Lehman, the firm will continue to make hundreds of millions in profits every day, month and quarter, due to its newly found monopolist exposure when it comes to trading CDS, both as principal and as agent.

A week after the roll into new indices (HY13 and IG13) there was quite notable action in CDS land. Net notional change across all sectors was substantially negative to the tune of $282 billion, which however consisted primarily of matured transactions accounting for $330 billion of this number, implying the adjusted number was around positive $50 billion and a notable derisking. There likely has been a corresponding netting out on the New Transaction side over the past month as accounts were rolling existing positions.

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).

After several consecutive weeks of equity market mimicking and rerisking, the CDS market finally saw a net derisking in the week ended August 14, across virtually sectors, with the biggest action concentrated in the financials arena. Total net notional change was substantially higher than last week's -$14.5 billion, increasing to $66.1 billion, with a marked derisking in financials at $62.6 billion. Other notable derisking spaces were Consumer Services at $27.6 billion (again) and Utilities at $20 billion.

Continued substantial rerisking continued in financial last week, however at a slightly moderated rate. From the $96.2 billion net notional decline in the week ended July 31, the last week saw a $54.4 billion decline. Total net notional change was one tenth that of the previous week at -$14.5 billion, with a marked derisking in consumer services at $25.1 billion. Other notable derisking spaces were Industrials and State Bodies.

Fitch has released a comprehensive study on derivatives held by various corporations and has come out with some disturbing results: as Zero Hedge's recent disclosure of data from the Office of the Comptroller of the Currency confirmed, the bulk of the derivative risk is concentrated not merely in the "financial company" category (99.7%) but in a subset of just five companies, which account for an "overwhelming majority" of derivative assets and liabilities.

The name of the game last week was the roll, with the expiration of the June contract leading to over $300 billion in Matured Transactions. New protection creation was delayed into the roll and this week will likely see a comparable pick up in new protection purchasing.

The name of the game last week was the roll, with the expiration of the June contract leading to over $300 billion in Matured Transactions. New protection creation was delayed into the roll and this week will likely see a comparable pick up in new protection purchasing. Approximately $200 billion in net notional exposure was removed from the system, however with $300 billion accounting solely to terminations, implies there was a net $100 billion purchasing offset that was not roll related.

The name of the game last week was the roll, with the expiration of the June contract leading to over $300 billion in Matured Transactions. New protection creation was delayed into the roll and this week will likely see a comparable pick up in new protection purchasing. Approximately $200 billion in net notional exposure was removed from the system, however with $300 billion accounting solely to terminations, implies there was a net $100 billion purchasing offset that was not roll related.

After three very volatile weeks, it seems the CDS world tapered off modestly. While action was rather subdued, the bulk of activity was focused on insurance buying, with over $63 billion in net notional being purchased in over 3,400 contracts. Total cumulative CDS action since the beginning of April grew to over $400 billion, and virtually all sectors are now net derisked over the past 2 months, with the consumer leading the risk parade.

After many weeks of cumulative derisking, the CDS market rerisked violently, most notably in the Consumer Goods and Consumer Service sectors, where a total of $169 billion in net notional open interest rerisking occurred. One explanation is that the big move is due to unwinding of new issue basis trades put on over the past month as horrendous companies issued all sorts of garbage debt.

Credit is now officially done with the rally. While last week's unprecedented $215 billion in CDS purchased will likely be a record for a while, this week saw yet another substantial $120 billion in net notional increase, based on 5,770 contracts exchanged. Also, net cumulative notional CDS by sector has surpassed the half a trillion mark since early April.

Credit is now officially done with the rally. While last week's unprecedented $215 billion in CDS purchased will likely be a record for a while, this week saw yet another substantial $120 billion in net notional increase, based on 5,770 contracts exchanged. Also, net cumulative notional CDS by sector has surpassed the half a trillion mark since early April.

The latest data out of DTCC indicates that the volatility in the equity world is spreading to credit. Not only that, but last week the CDS market turned decidedly pessimistic, with over $215 billion in net CDS purchased, the highest amount in terms of net notional in over 2 months. Cumulative net CDS purchased since the start of April has ramped up to almost half a trillion dollars.

If "Buy CDS" was the prior week's motto, this one's was "Do nothing, act busy, make many trips to kitchen." A paltry $6 billion in net CDS exchanged hands in a rerisking direction.