So, many of you will remember last week’s Cashin’s Comments, in which UBS’s Art Cashin communicated a gloomy tone from the NYSE trading floor.Specifically, he commented on how the traders were less worried about a potential Greek debt default, but more worried about the potential cascading effects in the credit default swap (CDS) markets.
Here’s an excerpt from last week’s note:
But, traders fear a worse outcome might occur if the CDS contracts do not kick in. What good is insurance that doesn’t pay off. That could lead to the assumption that all CDS insurance was useless. That would stratify debt around the globe. Great credits could get all the money they wanted, but less than great credit would be shut out because it could not be insured. That could make the future one in which “the haves” will have whatever they want and all others nothing. Welcome back to the Middle Ages.
However, Cashin has now issued a somewhat bizarre retractment in this morning’s Comments:
Oops! Or As Caesar Might Say – Mea Culpa – Last week, I wrote about several of the concerns that I, and some other floor types, had about potential risks in credit default swaps (CDS) in the somewhat shaky rescue negotiations on Greece.
A few nice people contacted me to kindly note that the CDS world has changed greatly since I first learned about it back in the clay tablet era.
I had suggested that no one knew how much CDS exposure there was on Greek debt. That is not the case. I have been informed that these days market participants “have been required to provide details of all CDS trades to a central reporting repository (The Depository Trust and Clear Corporation).” Further, “DTCC publishes summarized information of all CDS trades in the warehouse on a weekly basis (http://www.dtcc.com/products/derivserv/data/index.php). Based on this week’s data, there are currently 4,204 trades outstanding that reference the Hellenic Republic with a net notional of $3.2bn.”
Additionally, “Global regulators have access to detailed trade level information from DTCC. As such, the regulatory community knows exactly which counterparties (both bank and non-bank) would be exposed to a Greek credit event.”
So, despite my mistaken apprehensions, the size of the CDS situation is not opaque and is actually quite visible. As Alexander Pope almost said – “A little knowledge is a dangerous thing”. Thanks for the corrective input.
So, there you have it.
But some questions remain. Did the traders misinform Cashin? Was Cashin just speaking to the wrong traders? Did Cashin make up the trader buzz? We’ll update when we find out.