The murky world of credit default swaps just got a little bit clearer. Bloomberg has a story summarizing data released by the Depository Trust & Clearing Corp. (DTCC) who maintains a database tracking CDSs. The DTCC released the information in response to government complaints that nobody knows what’s going on in the unregulated CDS world.
Bloomberg: A total $33.6 trillion of transactions are outstanding on governments, companies and asset-backed securities worldwide, based on gross numbers, the DTCC said in the report released on its Web site yesterday. After cancelling out overlapping trades, investors have taken out a net $22.7 billion of contracts based on Italy’s debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt, the report shows.
The bigger the debt, the bigger the amount of CDSs outstanding. And this amount, while gigantic, is soothing in that it is nearly half of the amount believed to exist in May.
More information from the report:
After subtracting redundant trades, only $5.2 billion of trades actually changed hands, DTCC said last month, the first time it had released such information from its data warehouse.
Dealers have been trying to reduce the number of contracts outstanding by tearing up overlapping trades, helping reduce the net number of transactions and allaying concerns that the market was too large. The Federal Reserve and the European Central Bank are pushing dealers to create a clearinghouse to act as a counterparty on each trade, eliminating the risk of one side defaulting.
And what are the implications for Spain and Italy? Warning: It’s a bit dense:
Investors have focused wagers on debt of industries and countries that may be most affected by a credit crisis entering its 15th month. The Spanish economy is headed toward its first recession in 15 years amid a slump in its housing market and banking and finance shares have dropped as the credit seizure caused some to collapse.
Credit-default swaps on Italy were quoted at 107.5 basis points today, CMA Datavision prices on 10-year contracts show, after reaching a record 138 basis points on Oct. 24. The contracts have more than doubled since August. Today’s price represents a cost of $107,500 a year to protect $10 million of debt for 10 years.
Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 78.5 basis points.
Here is access to the raw DTCC data. Go nuts.
And in case you’re confused about credit default swaps, may we recommed this podcast from NPR that explains them in plain English?
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