The CDS Market – An International Perspective Tokyo / 3 June 2014
The Science of Finance
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Markit’s Role in the Credit Market
—Data Services — Price Data (spreads and context)
— Value Added Services (liquidity, sector curves, sensitivities)
—Administrator of — Credit Event Auctions
— ISDA CDS Standard Model
—Clearing — Services to the clearinghouses
— Distributor of clearing settlement prices
—Markit Indices
—Markit RED
—MarkitSERV — Trade matching, confirmation, clearing and regulatory reporting
—Portfolio Compression
—Transparency and education
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JSCC and Markit
—Markit and the JSCC have partnered in various ways over the
years — Markit handles index and upcoming single name CDS submissions from
clearing members
— Markit calculates the clearing price on behalf of the JSCC
— Markit distributes the JSCC clearing prices
— MarkitSERV connects clearing participants to the JSCC
Trends
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Historical Perspective
1999 ISDA Definitions
2003 ISDA Definitions
2005 Credit event auctions
2008-2009 Credit Crisis (Lehman, Fannie, Freddie)
April 2009 Big Bang + Trading conventions
2012 Mandated Clearing
Trade reporting
2013 SEF 2014
MAT
2012 Greek Default
2010 Aiful, JAL
2014 (Expected) JSCC Single Name clearing
2014 ISDA Definitions
2011 JSCC clears iTraxx Japan
March 2009 Central Clearing
2008 Portfolio Compression
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— Many regulatory events
— DFA
— MiFID
— EMIR
— Basel III
— IOSCO
— Themes include
— Transparency
— Clearing
— Electronic trading
— Collateral/Margining
— Benchmarks
—Some certainty and some unanswered questions
— All rules not finalized
Regulations
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Clearing is Established
Markit provides official CDS settlement prices daily for several clearinghouses
around the world:
* Instruments for Indices; Entities/Sovereigns for Single Names
Clearing House Instrument Type Coverage * Usual Time SLA Time
ICE Clear Credit Indices 128 5:00pm EST 5:20pm EST
ICE Clear Credit Single Names 326 4:45pm EST 5:00pm EST
ICE Clear Europe Indices 44 5:00pm GMT 5:20pm GMT
ICE Clear Europe Single Names 163 4:45pm GMT 5:00pm GMT
JSCC Indices 10 3:45pm JST 3:45pm JST
LCH Clearnet SA Indices 145 5:30pm GMT 5:30pm GMT
LCH Clearnet SA Single Names 187 6:00pm GMT 6:00pm GMT
CME Indices 56 6:00pm EST 6:00pm EST
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Pervasiveness of CDS
Banks
• Risk Management
• Trading
• Valuation
Asset Managers
• Risk Management
• Trading
Regulators
• Rule writing
• Monitoring
Platforms
• Product creation
• Trading
Press
• Credit Monitoring
Corporations
• Market Monitor
• Information
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Market Structure for Liquidity Formation
Source: TABB Group
Bilateral
(fully customizable)
Counterparty “Organized Market” – ECN, SEF
Request/Order Message and Direction
Potential or Future Counterparty “Organized Market” – Exchange, ECN, MTF
Traditional
RFQ
(1-way, provisional liquidity)
Early Stage Electronic
Order-Driven
(2-way, full multilateral)
Where Regs Want to Go
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Electronic Trends
89%
79%
19%
11%
21%
59% 22%
2012
2013
2015e
Voice RFQ Electronic RFQ CLOB
What changes are you seeing in the swaps market? Why do you trade on the phone?
What percentage of your swaps will trade via
Source: TABB Group Report: US Swaps 2013: The Future Is Emerging (date)
Based on
conversations
with 50 US Buy
Side Firms,
circa Sept.
2013
74%
24%
24%
11%
7%
Electronification
Ticket Size Change
Less Liquidity
Other
Regionalization
50%
36%
18%
14%
11%
7%
7%
Habit
Trade Size
Relationship/Market Color
Liquidity
Trade Complexity
Market Structure
Dealer Axe
2014 ISDA Definitions
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— Three major changes impacting CDS Pricing
— New Bail-in trigger for financial entities — “a new credit event triggered by a government-initiated bail-in and a provision for
delivery of the proceeds of bailed-in debt or a restructured reference obligation”
— Sovereign CDS asset package delivery — “introduces the ability to settle a credit event by delivery of assets into which
sovereign debt is converted”
— Standard Reference Obligations (SRO) — “the adoption of a standardized reference obligation across all market-standard CDS
contracts on the same reference entity and seniority level”
ISDA 2014 Definition
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— The launch of the 2014 Credit Definitions will impact single-name
trades in different ways: — Legacy corporate contracts will automatically move to the new definitions through a
protocol
— Legacy sovereign and European financial contracts will not automatically move to
the new definitions
— This discrepancy will be reflected in Markit indices as well, since the
index baskets follow single-name conventions. For example:
ISDA 2014 Definition
iTraxx Europe Financials Non-Financials Basket Type
22 and above 2014 Definitions 2014 Definitions 2014 Definitions
21 and below Old Definitions 2014 Definitions Mixed
Liquidity
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Investment Grade – Historical View
Source: Markit
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High Yield
Source: Markit
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Volatility
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1/2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014
Realized Volatility
iTraxx Europe iTraxx Europe Crossover
Source: Markit
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— Futures and Options global traded volume(1)
— 22.3 billion contracts in 2010
— 24.9 billion contracts in 2011
— 21.2 billion contracts in 2012
— 21.6 billion contracts in 2013
— As of 5/9/2014: 1.7 million credit products contracts total in existence(2)
— The most liquid credit derivatives trade on average ~400 times daily(3)
(1) Source: FIA
(2) Source: DTCC
(3) Source: MarkitSERV Volumes
A Perspective
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Geographical Breakdown
Region Liquidity
Score 1
Liquidity
Score 2
Liquidity
Score 3
Liquidity
Score 4
Liquidity
Score 5
Total
Entities/Tiers
APAC 23 (4%) 37 (6%) 86 (13%) 251 (39%) 249 (39%) 646
Americas 231 (20%) 104 (9%) 105 (9%) 316 (27%) 398 (34%) 1,154
Europe 205 (25%) 87 (11%) 103 (13%) 244 (30%) 177 (22%) 816
Other 5 (5%) 3 (3%) 19 (18%) 49 (46%) 35 (33%) 106
Total 464 231 308 860 859 2,722
— The 2,722 entity/tiers of Markit CDS End of Day pricing
service sliced by region and liquidity score (as of April 30, 2014)
— Liquidity score is rated 1 through 5 (1 is most liquid)
Source: Markit
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APAC Breakdown by Country (CDS)
Region Liquidity
Score 1
Liquidity
Score 2
Liquidity
Score 3
Liquidity
Score 4
Liquidity
Score 5 Total
Japan 14 22 34 118 150 338
Australia 3 11 20 16 26 76
Korea
(Rep of) 1 1 12 34 7 55
Hong Kong 0 1 4 16 16 37
India 0 0 5 15 10 30
Singapore 0 0 4 12 10 26
Other 5 2 7 40 30 84
Total 23 37 86 251 249 646
— APAC breakdown is mostly Japan and 4/5 liquidity scores — Other consists of Malaysia 18, Taiwan 13, Thailand 13, Philippines 12,
China 11, Indonesia 7, New Zealand 5, Other 5 countries totaled 5.
Source: Markit
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Trade Volumes
Other CCY (AUD, CAD, CHF, HKD, SGD) account for 0.16%
Source: DTCC (As of week of 5/9/2014)
61%
36%
3%
DTCC TIW Trade Count by CCY
USD EUR JPY
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Bid-Ask Spreads Volatility – iTraxx Europe
Source: Markit, as of May 2014
0
0.5
1
1.5
2
2.5
3
3.5
1/9
/2008
3/9
/2008
5/9
/2008
7/9
/2008
9/9
/2008
11/9
/2008
1/9
/2009
3/9
/2009
5/9
/2009
7/9
/2009
9/9
/2009
11/9
/2009
1/9
/2010
3/9
/2010
5/9
/2010
7/9
/2010
9/9
/2010
11/9
/2010
1/9
/2011
3/9
/2011
5/9
/2011
7/9
/2011
9/9
/2011
11/9
/2011
1/9
/2012
3/9
/2012
5/9
/2012
7/9
/2012
9/9
/2012
11/9
/2012
1/9
/2013
3/9
/2013
5/9
/2013
7/9
/2013
9/9
/2013
11/9
/2013
1/9
/2014
3/9
/2014
5/9
/2014
iTraxx Europe - Bid/Offer Spread
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Bid-Ask Spreads Volatility – iTraxx Japan
0
5
10
15
20
25
1/1
1/2
008
3/1
1/2
008
5/1
1/2
008
7/1
1/2
008
9/1
1/2
008
11/1
1/2
008
1/1
1/2
009
3/1
1/2
009
5/1
1/2
009
7/1
1/2
009
9/1
1/2
009
11/1
1/2
009
1/1
1/2
010
3/1
1/2
010
5/1
1/2
010
7/1
1/2
010
9/1
1/2
010
11/1
1/2
010
1/1
1/2
011
3/1
1/2
011
5/1
1/2
011
7/1
1/2
011
9/1
1/2
011
11/1
1/2
011
1/1
1/2
012
3/1
1/2
012
5/1
1/2
012
7/1
1/2
012
9/1
1/2
012
11/1
1/2
012
1/1
1/2
013
3/1
1/2
013
5/1
1/2
013
7/1
1/2
013
9/1
1/2
013
11/1
1/2
013
1/1
1/2
014
3/1
1/2
014
5/1
1/2
014
iTraxx Japan - Bid/Offer Spread
Source: Markit, as of May 2014
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The On-the-Run effect in Europe
Source: Markit, MarkitSERV (only days with more than 5 trades are reported), as of May 2014
0
200
400
600
800
1000
1200
1400
May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14
Moving Off-The-Run (iTraxx Europe S18, S19 and S20)
ITRAXX Europe 18 - Trade Count ITRAXX Europe 19 - Trade Count ITRAXX Europe 20 - Trade Count
\ 25
The On-the-Run effect in Japan
0
50
100
150
200
250
300
350
May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14
Moving Off-The-Run (iTraxx Japan S18, S19 and S20)
ITRAXX Japan 18 - Trade Count ITRAXX Japan 19 - Trade Count ITRAXX Japan 20 - Trade Count
Source: Markit, MarkitSERV (only days with more than 5 trades are reported), as of May 2014
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Concentration
— Top 500 entities account
for 86% of single names
gross notional
— Ratios have not changed
since 2009
Source: Markit, DTCC – as of May 2, 2014
DTCC Top 1000 Single Names Distribution
1-100 Entities
42%
101-200 Entities
16%
201-500 Entities
27%
501-1000 Entities
15%
Conclusion
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—CDS are still a relatively new market
— It is evolving rapidly
—They are useful and economical tools
— Indices are liquid
—Single name liquidity is concentrated
Conclusion
Thank you.
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