Quick Takes: Most active names in credit derivatives – April 2024
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Ali Curi: Hi everyone and welcome to ION Markets Quick Takes. 

I'm Ali Curi and every week, along with my guests, Amir Khwaja and Chris Barnes, we take a quick dive into the headlines on the Clarus blog. 

Let's get started. Hi Amir. Hi Chris.

Amir Khwaja: Hi Ali. 

Chris Barnes: Hi Ali. How are you doing? 

Ali Curi: I'm doing great. Amir, let's start with you. What's your Quick Takes for this week? Which headline from the ClarusFT blog would you like to discuss? 

Amir Khwaja: The blog is "Most Active Names in Credit Derivatives - April, 2024."

I guess it's been six months since I last covered this. So the SEC has a trade repository in the U.S. where credit derivative trades or credit default swaps are made public on single names.

So on some frequency in every few months, I cover what's new in that data. And really what's interesting here is I break it down into two types; credit default swaps on sovereigns and credit default swaps on corporates. And we look at the most active names. We can do that on a what's changed on a day-to-day basis, week to week, month to month.

So for the blogs, I look at monthly most active names compared to the prior month. So if we look at sovereigns, we see the usual names. So credit default swaps are used to buy or sell protection on default of an issuer. And sovereigns tend to be, I guess the most active issuers. So we can see, in April, the top five names are the same as the prior month; South Africa, Brazil, Mexico, Columbia, or top four names.

So these are active issuers and there's interest in the market to buy protection on those names. In case they were to default on their debt. So what's most interesting is, which I've moved up and down that ranking compared to the prior month. I think in the blog, I point out that some of the Middle Eastern issuers have become more active, right?

So Bahrain, Qatar, Egypt have gone up and down the charts compared to the prior month. The Middle East, is becoming a more active market for debt and equity. So that's a change. But often, I think, the other interesting point I was trying to look at is that there's also some activity in buying protection on the US of A, right?

Which is quite surprising, the USA has never defaulted. It's the best credit in the market, but there are a few trades, some small number of trades, handful a month, on a market, on protection on the U. S. defaulting on its debt. And we know, obviously, the debt is huge now, but of course it's obvious why those trades exist, but they are there, so I often point that out to see whether they are, there were only some seven trades in April. So it's not many trades, but $35 million notional, $5 million cap. And then I guess on the other side, before I ask Chris to any comments, corporates are more interesting, right?

So obviously there's a much more active market in corporates and corporates do default depending on, on their debt and their credit ratings change a lot more, more actively. There you see lots of changes in the ranking based on who's issued debt recently, what the news is, what the market's view is on their, on their probability of default of their debt, right?

And I guess typically the more active name that goes up, we think there's something happening with that name. In the U. S. corporates table for April, Goodyear Tire and Rubber Company's up a lot, Royal Caribbean Cruises up a lot, TransOcean, Avis Budget. So again, names. So there's obviously some activity more interested in buying or selling protection in that particular name, which is interesting.

So I'm looking at it monthly, but people can look at the same data on a daily basis, right? And that gives you more of a view as to what's happening, in that name, right? And similarly in the blog, I look at European corporates, Japanese corporates, and the change in volume and activity in those names in the credit protection markets.

So I think that's mostly what I intended to cover. Chris, do you have any questions on that blog? 

Chris Barnes: Questions and comments, one side on the macro side and one on the market structure. If we start on the macro side, obviously we all love the great United States of America. What a great country it is!

But when you say it's the best credit in capital markets, I think I should pull you up on that a little bit, because I'm not sure that Fitch and S& P would necessarily agree with that, Amir. Yes, they've never, defaulted, but I think the whole point of monitoring activity and names as diverse as the USA is that as the election approaches, if Trump gets back in and he's fiscally irresponsible with tax cuts, if Biden gets in again, and he massively extends the state and spending as well, there is the possibility of more downgrades in the future. And CDS isn't just a digital product, right? It doesn't only pay off in the event of a default, the spread changes on your swap. That is an MPV gain to you. And so I can see a very valid case, particularly in the run up to November, the monitoring of these levels of activity, particularly names like the U.S., closely. So I wanted to check for those trades on the U.S., what is the price data? Is it clean? Is it clear? What spread it's trading at, or is it still very difficult to actually interpret the price data?

Amir Khwaja: Yeah, good question, Chris. So I guess the price data is not great. Surprising that after so long of public transparency, it has not improved, right? I think it needs to be disclosed. It's not always disclosed correctly. So we would like to see the credit spreads on these names. We see them on some trades. Not on the majority of trades, right? So that's a problem. 

So I guess my issue with the rating agencies, clearly, I think I'm thinking, that they may rate U.S. debt at a lower rating than Swiss debt or Japanese debt or whatever. I'm not sure what those current ratings are, right?

But we do know that in the event of a market crisis and a flight to safety, U.S. Treasuries go up. Maybe coal goes up, or maybe Swiss, but essentially the majority of gains are in U.S. Treasuries. So the market does believe that, that is the lender of last resort in markets.

But you're right. So I think what is the fiscal, what's the issuance of US Treasuries going up to $40 trillion in a few years? Obviously, it's huge numbers, right? 

Chris Barnes: Very deep and liquid. If we move from that macro lens, does anybody clear CDS on the U.S. name or is that only a bilateral trade?

Amir Khwaja: I believe those are bilateral trades. I would need to check. I doubt anyone clears those. I would need to check. And so that field is made public. 

Chris Barnes: It is. So I guess very few of the single name corporates are cleared, but some of the sovereigns are cleared. Would that be fair or will it really vary from month on month and name specific?

Amir Khwaja: Yeah, I think we need to check that. So we have that data, so we can look at most active cleared, uncleared, and look at between the two. I didn't do it in the blog on an open basis, but yeah so we can slice and dice in that way. And I would say, yeah. 

Chris Barnes: And so related to that final question is, do we know how much of the total global market is shown in the SEC data?

Because obviously it's capped at $5 million dollars. So I guess we can't do it from a notional perspective, but I think some of the CCP's publisher trade count as well. 

Amir Khwaja: So that could be done. I don't recall when I last did that. So I can't really quote the numbers, but yes, you can. Because the $5 million notional cap on single MCDS in this data means it's meaningless to do it on notional, but on, on trade count, we have good sense.

Chris Barnes: It sounds as if I've given you a follow up blog there, Amir. 

Amir Khwaja: Thanks Chris. More ideas are better. So I think as well as what the Clearinghouse has published on their volumes, there's also the Trade Information Warehouse from DTC, that has disclosures. I'm not sure their trade counts, but they're certainly notionals.

So it will be possible to look at how much of this market is in the SEC data, which is U.S. person's data. And I would have thought for U.S. names, certainly it'd be a substantial part. 

Chris Barnes: Makes sense. Thanks Amir. 

Amir Khwaja: Great. Back to you Ali.

Ali Curi: Gentlemen, I think that's a wrap up. Amir Khwaja, Chris Barnes.

Thank you both for sharing your Quick Takes. Let's do it again next week. 

Amir Khwaja: Thanks Ali. 

Chris Barnes: Thanks Ali. Speak to you next week. 

Ali Curi: And that's our episode for today. You can read more about these topics on the Clarus blog, and you can follow ION Markets on X and on LinkedIn. 

Until next week, thank you for joining us.