CDS Market Shrinking

Credit Default Swap (CDS) dealers have reduced outstanding contracts for the first time since 2001 (see Bloomberg article). The volume of trades globally fell to $54.6 trillion from $62 trillion, according to the International Swaps and Derivatives Association. Traders are unwinding trades and protecting against losses as the U.S. credit markets continue to struggle. Currently, 17 banks handle about 90 percent of trading in credit derivatives. At the request of the Federal Reserve Bank, these individual banks have begun tearing up trades that offset each other in an effort to help reduce the day-to-day payments, paperwork, and potential errors, further reducing the amount of capital that commercial banks are required to hold against the trades on their books. It is unclear how many offsetting trades are left, and what level of counterparty exposure that will remain once the tearing up of trades completes.