Clarus Financial Technology

CDS Clearing Data

A few times last week I heard concerns about whether clearing of Single Name CDS will ever take off.  It inspired me to examine the data we have on hand for credit derivatives, both index and Single Name, to see what I can make of it.

While we’ve written lots of articles on OTC swaps, very few of them have focused purely on Credit.  Why is that?  Well for starters, the CDS Index game is largely “securitized” already.  The chart below shows weekly SDR trading activity of CDS Index for the past 1 year, spanning the 5 major indices.  The bulk of this activity is already on-SEF and cleared.  You’ll have to trust me on that, or use SDRView yourself to confirm.

Weekly SDR activity for CDS Index. Scale is in Billions of USD equivalent.

Further, Single name CDS are a SEC-governed product, so there is still very little public transparency into the trade data.  Occasionally we’ll see some single name swaps go through on SEFView and SDRView, but frankly I’m not sure how or why.  I should note two things:

  1. Security-based swaps will have their time soon enough, as the SEC announced in January 2015 that they are working on rules for them.
  2. DTCC TIW (not SDR) do publish rafts of aggregated data, just not at the trade&price level of transparency.

Until then, the only data we have at hand for single name is CDS clearing data, which we provide on CCPView.

Data

Lets start with clearing data across all credit default swaps.  I will use our terminology “CDX” to refer to all indices, and “CDS” to refer to all single-name swaps.  The chart below looks at daily clearing activity since December 1, 2014.

A general word of caution in all of this data is that this data spans both dealer and client.  Here, I have to rely simply on anecdotes that state the vast majority of cleared credit is dealer business.

Daily Clearing Volume, CDS & CDX, since Dec 1, 2014. Amounts in millions of USD equivalent.

Right off the bat, we can observe:

In order to see the scale of CME, LCH and JSCC, we need to remove the two ICE clearing houses.  CME is now the blue bar, LCH red, and JSCC the occasional green blip you will see.  I should warn that JSCC reports their activity on a monthly basis, so their clearing volume is lumped onto the last day of the month.  Monthly reporting is not too bad when you consider they currently clear on a weekly basis:

Daily Clearing Activity WITHOUT ICE. Amounts in millions of USD equivalent.

Lastly, no view of clearing is complete until you have the obligatory Open Interest chart showing some big numbers:

Clearing OI. Amounts in millions of USD equivalent.

The cleared market in credit stands at roughly 1.55 trillion dollars.  Perhaps interesting to note the Jan and Feb reductions in OI at ICE.  This is one of two things:

Because clearing houses actively compress contracts on a daily basis, these OI changes would seem to be more of the latter.  However when I looked closer at the data, I discovered that the first big drop down was on January 6th.  The EUR/USD rate was adjusted properly on January 1st, so there is likely more to it than just FX translation.  If I had the energy to drill into the index or single name(s) that caused this, I would, but I will leave that for now as food for thought, and possibly another blog.

What is Cleared

So where does it all come from?  The following table breaks out clearing activity by what we call Product Sub-Type:

Clearing Activity by Product Sub-Type.  Dec 1 2014 to April 10, 2015. Amounts in millions of USD equivalent.

Couple things of note here:

Next up, lets look at Open Interest in these instruments:

Clearing OI by Product Sub-Type, as of 10-Apr-2015. Amounts in millions of USD equivalent.

What I find interesting here, once again, is the scale of open interest in Single Name CDS.  This tells us that while single name swaps represent roughly 11% of the daily activity of credit clearing, they represent 40% of the ~1.55 trillion in open interest.  Surprising?  It shouldn’t really be, when you consider the sheer amount of single names out there vs the handful of liquid indices.  Should also remember that some amount of the CDX OI represents a hedge to the Single Name CDS OI.

Which Single Names Matter

Just for laughs, I decided to download the single name data into excel and whip up a chart on the OI:

Clearing OI by Sovereign Name. In Millions of USD Equivalent.

I couldn’t readily get a CCP legend to show up when I stacked the results, so you’ll have to take my word that orange is ICE Clear Europe and blue is ICE Clear Credit.  As for the data, not surprising.  CDS contracts in Italy represent:

I attempted the same analysis for single name corporate CDS.  Because there are literally hundreds of names cleared, and charts don’t behave well with 566 names in it, I limited my chart to the top 20 names.  Here, I managed to get a legend to show up for the stacked data.

Clearing OI by Corporate. In Millions of USD Equivalent.

All well and interesting.

What Percent is Cleared

So how much of daily activity in single name is cleared?  I don’t believe there is a single source that tells us this.  But if I:

Sounds simple, but you need to understand how TIW reports their activity.

First part is easy, here is the weekly cleared activity for the top 20 names that week at ICE Clear Credit:

Top 20 activity at ICE Clear Credit, week ending 10-Apr-2015.

Sizing up the entire market of cleared & uncleared is much trickier.  Using TIW data, there is a myriad of additions (new trades, assignments, backloads, etc) and reductions (terminations, post-trade-events, etc).  If I pluck a few large numbers out for Computer Sciences Corporation:

Now, I’d really have to dig down and make some assumptions on what all these PTE events mean at the clearing house.  Alas, I will disregard all of the “reductions”, and I’ll even disregard the assignments.  Doing so gives me:

I’m not terribly comfortable with that analysis at all.  Its hard to disregard billions when your denominator is only a billion.  If any readers have some guidance, I would pledge to update the analysis.

Trends

Going back to where this all came from, I wanted to spot some trends in the clearing data, particularly in single name CDS.  So, I put together the following chart, for what its worth.  Again this is dealer and client combined:

Clearing Volumes by Type. In millions of USD Equivalent.

Very hard to make much out of that.  Alas, it’s not a topic you can monitor readily with clearing data alone.  Whilst I uncovered some interesting data tidbits during my exploration, this really can’t help me understand if there has been a growth in the cleared CDS market.

I believe the theory goes something like this:

OK maybe that last point is a stretch, but I’ll leave it there for now.  I hope some of the data proved interesting.

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