Creditflux Newsletter

The volume of CSOs grew in the first quarter. But this does not mean a return to the boom years of investment-driven trading. Research by Ayobami Akomolafe

The volume of new CSOs traded in the first quarter of 2009 rose slightly on the same period last year. In risk-weighted terms, volumes rose from $178 billion to $204 billion.

However, as the charts opposite show, volumes have fallen hugely from the heyday of the market in 2006 and 2007.

The nature of the market has also changed substantially since those days, when volumes were driven by investors selling protection on mainly mezzanine tranches – often in the form of rated notes.

Now, the drivers of the market are different. Many trades are being done as investors restructure or unwind their portfolios.

Creditflux’s league tables are based on volumes of tranched protection bought or sold, so a trade in which an investor unwinds its position by buying protection from a dealer counts towards that dealer’s total. (Straight unwinds, where no new trade is created, do not count towards the total, however.)

But the business is not purely about unwinding old investments. There is anecdotal evidence that bank credit portfolio managers remain active users of the market, for example.

Clearly, this remains an attractive business for a number of large banks, who continue to make markets in tranches of bespoke portfolios and indices.

Their ranks have now stabilised, with the same core handful of banks remaining active in the market over the past year or so. BNP Paribas remains the largest dealer in bespokes, as it was for 2008. This quarter, Citi takes top spot for index tranches in delta terms.

• View the Q1 2009 league tables here