Derivs - Credit

The European Securities and Markets Authority's decision to delay publishing essential credit derivatives clearing standards could mean that the European Commission is reconsidering an €8bn notional clearing threshold for the front-loading of trades, market participants hope.

We’ve commented in recent weeks on volatility, but it’s been mainly a macro phenomenon. Geopolitics, Ebola and uncertainty over monetary policy have all contributed to spread oscillations.

Hedge funds have played the recent compression between iTraxx Crossover and iTraxx Main by entering a decompression trade between the two indices this week, expecting further divergence between investment grade and high yield valuations if the European Central Bank were to announce a buying programme involving corporate bonds at its upcoming December 4 meeting.

The overall interest rate derivatives trading volume reported to swap data repositories last week fell by 18% from the previous week, according to data from the International Swaps and Derivatives Association (ISDA). This follows a week of modest increases in trading volumes.

Hedge funds and real money investors have been extending volatility positions on iTraxx Main and CDX IG this week, as lighter flows return to the credit market and both calendars and smiles remain steep.

Institutional investors looking for exposure to contingent convertible (CoCo) bonds are showing interest in total return swaps on a new CoCo index launched by Markit on Monday.

Agency trading is an important tool for avoiding basis risk in package trades, especially for the more complex structures that are yet to be made available to trade on swap execution facilities (SEFs), according to speakers at the Sefcon V conference in New York.

Reporting of over-the-counter and exchange traded derivatives to repositories is floundering in its aim to make trading more transparent, some seven months since reporting started in Europe. Market participants say a broken system consisting of multiple trade repositories could harbour risk, rather than reduce it.

Geopolitical risk was all the rage earlier this year, and played a major part in credit spreads widening in several short, sharp bursts. Monetary policy soon resumed its role as the main driver of sentiment, but there were indications this week that it may have to move aside again.

The overall interest rate derivatives trading volume reported to swap data repositories last week was up 27% from the previous week, according to data from the International Swaps and Derivatives Association. This follows several weeks of consistent decline in the figures.

Hedge funds and real money investors were fast to sell volatility on iTraxx Main and Crossover after the European Central Bank meeting on November 6, causing the volatility calendar and the volatility smile to steepen.

The European Securities and Markets Authority (ESMA) has asked market participants if it should prescribe which counterparty should be responsible for the creation and transmission of the unique trade identifier (UTI) in trade reporting. The UTI allows two counterparties to pair and match two sides of the same trade at a trade repository, however confusion over how one is generated has blighted reporting since it became mandatory earlier this year.