bloomberg.com
Credit Swaps Top $33 Trillion, Depository Trust Says (Update2)
By Shannon D. Harrington
Nov. 4 (Bloomberg) -- Credit-default swaps totaling $33.6 trillion are outstanding on government debt, corporate bonds and asset-backed securities worldwide, the Depository Trust & Clearing Corp. said in a report that gives the broadest data yet on the unregulated market.
After canceling out overlapping trades, Italy's government debt tops the list with $22.7 billion in contracts, the report on DTCC's Web site today shows. A net amount of $16.6 billion of contracts are outstanding on Spain; $12.4 billion on Deutsche Bank AG, Germany's largest bank; and $12.1 billion on General Electric Co.'s finance arm, GE Capital Corp., the report shows.
``Publishing this data will provide greater transparency in a critical market,'' Tim Ryan, the head of the Securities Industry and Financial Markets Association in Washington said in a statement today. ``This is an important initiative upon which the industry will continue to build.''
Before netting, Turkey topped the list with $188.6 billion in contracts, and dropped to $7.6 billion after redundant trades were subtracted. On a gross basis, $15.4 trillion of transactions were linked to individual corporate, sovereign and asset-backed bonds, and about $14.8 trillion was tied to indexes. The New York-based DTCC estimates it sees about 90 percent of all trades.
The DTCC, which operates a central registry of credit swaps trades, released the data for the first time as traders in the market say concerns about potential losses from the contracts are overblown. The industry has stepped up efforts to counter critics among U.S. lawmakers and regulators who blamed the lack of data in the market for exacerbating the financial turmoil.
Lehman Collapse
The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many contracts were outstanding on the securities firm, or who holds them. Estimates ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.
After subtracting redundant trades, only $5.2 billion actually changed hands, DTCC said last month, the first time it had released such information from its data warehouse.
Credit-default swaps pay the buyer face value in exchange for the underlying securities should the borrower fail to adhere to its debt agreements. They are private contracts between two parties, don't trade on an exchange and aren't processed through a central clearinghouse, making it virtually impossible for the public to asses the amount wagered on the debt.
Trading Growth
There was a net $8.4 billion in contracts linked to Morgan Stanley's bonds and $7.6 billion was wagered on Merrill Lynch & Co., the securities firm that agreed to sell itself to Bank of America Corp. The net figures are the maximum that sellers would have to pay to buyers if the borrowers defaulted, DTCC said.
There were about $1.67 trillion in gross contracts linked to governments in the registry, $92.4 billion tied to residential mortgage-backed bonds and about $10.9 billion on commercial mortgage bonds. DTCC also reported $45.8 billion in contracts linked to bank loans.
Trading exploded 10-fold in the past decade as the market went from being largely a tool for banks to hedge loans to a place where hedge funds, insurance companies and asset managers could speculate on the creditworthiness of companies, governments and other borrowers, including homeowners.
Clearinghouse
The Federal Reserve is pushing dealers to create a clearinghouse to act as a counterparty on each trade, eliminating the risk of one side defaulting.
DTCC is controlled by a board of members, including JPMorgan Chase & Co., Goldman Sachs Group Inc. and other dealers that created and control trading in the credit-default swap market.
The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of the International Swaps and Derivatives Association.
Criticism of the market intensified in September after the collapse of Lehman and the U.S. government's bailout of American International Group Inc., which faced bankruptcy after credit- rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value.
U.S. Securities and Exchange Commission Chairman Christopher Cox called for authority to regulate the credit swaps market, saying the lack of disclosure and the web of connections between dealers in the market threatened the stability of the financial system. The Federal Reserve Bank of New York, which has spent the last three years pushing dealers to curb risks in the credit
Until now, publicly available data on the market was largely limited to bi-annual surveys by ISDA and the Bank for International Settlements, that showed the gross notional value of trades outstanding for the entire market, a number akin to trading volume.
To contact the reporter on this story: Shannon D. Harrington in New York at sharrington6@bloomberg.net
Last Updated: November 4, 2008 19:02 EST |
