Data on the market makers’ CDS books

Thanks to the FASB’s September 2008 amendment of FAS 133, it turns out that all the market makers report the notional values of their credit derivatives positions bought and sold in their 10-Ks and 10-Qs.  So I was able to look up the positions of the five biggest market makers in the US.  These holding companies account for 95% of all credit derivatives bought and sold by holding companies in the US (per the OCCs data).

Here’s what I found.  (Blue is credit derivatives bought, red credit derivatives sold and green is the difference between the blue and the red columns):

Observe that because we only have aggregate data, the net credit derivative position in the chart above represents a lower bound on the unmatched portion of the bank’s derivative books.  It possible that when individuals companies and indices are taken into account, an accurate count of each bank’s net position would be much larger than the green column above.

To emphasize the fact that it appears that market makers are buying credit protection on their own account, here is a chart of the net credit derivatives as a fraction of the total credit derivatives bought.

We see that about 9% of the credit derivatives bought by Citigroup and 5% of the credit derivatives bought by Goldman Sachs are not matched.  Most likely these firms are using credit derivatives to protect themselves against losses.

Finally we can look at the net credit protection bought relative to the firm’s assets:

This chart just emphasizes the fact that the commercial banks have much larger balance sheets than the investment banks, and thus that even though a bank like JP Morgan has a net credit derivative position that is similar to that of the investment banks, it is relying less on the protection of credit derivatives once one takes the size of the bank into account.

Because only Bank of America/Merrill Lynch is now (this is a change from previous quarters) a net seller of credit protection, we find that in aggregate the market makers are buying at least $400 billion notional in credit protection from other participants in the market.  An interesting question is who is selling this protection:  foreigners, insurers, end users?


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