Latest DTCC CDS Update (Week of March 6)

Net notional purchasing of protection dropped from $131.5 billion net in the prior week to a mere $12 billion last week, with a net contract increase of only 4,615 contracts compared to 30,348 in the prior week. The rerisking in consumer services has surprisingly continued at an accelerated pace with healthcare also seeing a significant net outflow in CDS notionals. Technicals suggest the consumer services space is due for a substantial widening in spread.

Gross outstandings decreased by $900 billion to $27.2 trillion, consisting of $14.6 trillion in single name CDS (unchanged from prior week), and index and index tranches of $12.6 trillion, a decline from $13.5 trillion in the prior week.

The significant reduction in index notional may be a troubling sign if it was predicated by contract unwinds ahead of either the clearinghouse launch, or the new fixed upfront contracts (which however are more relevant for single names). In either case, there has not been such a dramatic (7%) reduction in gross CDS in non-single names in over 6 weeks, implying there could be complications when equity-credit index arbs seek to hedge the volatile equity market in credit synthetics due to a simple lack of product (just thoughts here, nothing firm).



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