I’ve been spending some time with the Office of the Comptroller of the Currency’s data on derivatives. This is what I’ve found about credit derivatives:
(i) Commercial banks tend to buy and sell credit derivatives under the name of the bank, not under the name of the holding company. The credit derivatives of the investment banks are at the holding company level although about one-sixth of Goldman Sachs’ credit derivatives are bought and sold by the Goldman Sachs Bank. (In the chart below blue is the credit derivatives bought/sold by the holding company and red is the credit derivatives bought/sold by the bank. Note that I did not actually download the data on Morgan Stanley’s Bank because its credit derivative positions were trivial.)
(ii) Because the OCC collects detailed data about the derivatives bought and sold by banks we have extensive information on the positions of Citigroup and JPMorgan. However, detailed information on the derivatives bought and sold by Goldman Sachs Group, Morgan Stanley and Bank of America (now that it includes Merrill Lynch) is not available.
On the other hand what we know about the derivatives held by banks is interesting in its own right.
(iii) Neither Citibank, nor Goldman Sachs Bank is running a very closely matched credit derivatives book. (Note that for its size JPMorgan is reasonably closely matched, but the data simply doesn’t fit on the same chart as the other banks. Also, in the chart below blue represents credit derivatives bought by the bank and red credit derivatives sold by the bank.)
(iv) What’s more interest the difference between credit derivatives bought and sold doesn’t show up as much in the data on credit default swaps. (In the chart below blue is now CDS bought by the bank and red CDS sold by the bank.)
(v) The banks that are buying more credit protection than they sell are not using CDS to do this. (Blue: credit options bought; Red: credit options sold; Green: other credit derivatives bought; Purple (not visible): other credit derivatives sold; Light blue: TRS bought; Orange: TRS sold.)
While some of the market makers may be running matched books, it certainly looks as though others are using the credit derivatives markets to buy protection for themselves. Given the pricing power currently in the hands of the market makers, it may be worth paying close attention to the trades of market makers who are trading on their own account in a big way, because there is no question that the market makers are well-placed to extract rents from end users if that is what they wish to do.
Of course, it would be far more interesting to have this data for the holding companies, because that would give us all a better idea of how the dealer banks are using derivative markets. As things stand the claim that all the market makers keep matched books does not appear to be supported by the data that we have.
Synthetic Assets 