High costs for CDS trading will continue with central clearing

Commenting on Fitch’s global CDS survey released yesterday, UniCredit analysts note that market participants facing higher risk capital and collateral costs for credit default swap trading is a trend that will continue, even with the advent of a central clearing house.

Fitch surveyed 26 banks, most of whom agree that a central clearing house is necessary to address counterparty risk in the CDS market. Fitch’s survey reported that 88% of the notional protection sold and bought was traded with one of the top five counterparties, which makes counterparty risk a major concern amongst market participants.

The survey also shed light upon information about the CDS market that was previously unavailable, say analysts. The surveyed banks’ prominent role as market makers in CDS is highlighted by the fact that the total amount of protection sold stood at $13.8 billion, and total notional volume of protection bought stood at $13.9 trillion at year-end 2008. Moreover, the survey reported that about 12% of the traded volume originates from non-single name CDS and index CDS.