Derivs - Credit

Hedge funds are increasingly using iBoxx total return swaps to gain exposure to corporate credit markets through a more faithful proxy than CDS. Real money investors are also aping TRS to increase their exposure to the high yield bond market while they wait for supply.

The Depository Trust and Clearing Corporation has partnered with TriOptima, enabling daily reconciliation of over-the-counter derivatives trades that are reported to DTCC’s European trade repository via triResolve, as mandated by the European Market Infrastructure Regulation.

Société Générale has issued credit-linked notes on oil industry single names such as Transocean in response to demand from private banks.

The big story in the global economy as 2014 comes to an end is undoubtedly the sharp fall in the oil price. Brent crude has dipped below $70 a barrel, the lowest for about five years.

A credit event similar to the 2013 default of SNS Reaal would test out new terms of derivatives contracts, and would be likely to convince some market participants to make the switch from credit default swap contracts governed by 2003 definitions, to the new rules implemented by the International Swaps and Derivatives Association earlier this year.

Hedge funds and sophisticated real money accounts are cleaning up their credit option positions for year-end, which is resulting in sluggish flows on the indices.

Overall credit default swap notional that was reported to swap data repositories last week decreased by 40% from the previous week, according to data from the International Swaps and Derivatives Association. Overall interest rate derivatives trading that was reported was also down by 18% from the previous week. This follows a week of sizeable increases in trading volumes in both CDS and rates.

Hedge funds are eyeing a relative value strategy playing the divergence between iTraxx Main and 10 year swap spreads.

The International Capital Markets Association’s secondary bond markets liquidity survey shows the sellside is “surprisingly not as despondent as it could be”, as dealers adapt to the new business environment and revise how they charge for balance sheet. Although liquidity has grown far worse since the crisis, bond traders large and small still have strategies to stay in the business and have adapted to some of the challenges of regulation.

Back in the summer of 2013, there were two main themes that investors feared could trigger a change in the credit cycle. One is now a distant memory, the forces behind the other have exhibited a change of heart this year.

Hedge funds and big real money accounts have been selling options on iTraxx Main and Crossover this week after Mario Draghi, president of the European Central Bank, reiterated that the ECB will do whatever it can to raise inflation.

Overall credit default swap notional that was reported to swap data repositories last week increased by 63% from the previous week, according to data from the International Swaps and Derivatives Association. Overall interest rate derivatives trading that was reported, was also up by 28% from the previous week. This follows a week of modest decreases in trading volumes in both CDS and rates.