The lethality of CDS also lies in the amplification of bond default losses when reference bonds default. Since neither party needs to own the reference bond, the amount of guarantee is determined by both parties at will when purchasing insurance. It is not necessary and impossible to know in advance how many CDs have taken the bond as a reference, and the amount of guarantee may far exceed the unpaid balance of the reference bond. Once the bond defaults, the amount of compensation involved will be much higher than the amount of the bond itself, and more institutions will be involved.
The previous CDS market size was announced by the International Swaps and Derivatives Association (ISDA), which began to investigate the CDS market size in 200 1 year, which was 91900 million dollars at that time and reached the peak of 62 trillion dollars by the end of 2007. It fell to $55 trillion at the end of July this year. After the financial turmoil, especially after the bankruptcy of Lehman Brothers, some settlement institutions closed positions and settled the repeated CDS transactions, which greatly reduced the size of the CDS market. The debate over the repeated revision of this market size itself shows that the CDS market is opaque.
Transaction unwinding is equivalent to surrender in insurance, and there are two kinds of active unwinding and passive unwinding. A few days before the collapse of Bear Stearns and Lehman Brothers, voluntary liquidation reached its peak, mainly because the counterparty cancelled the transaction with these two investment banks, even paid a high fine, or transferred the transaction with these two banks to another institution (novation), and other parameters remained unchanged except that the counterparty changed. After Bear Stearns was acquired by JPMorgan Chase, all CDS transactions on the books were guaranteed by the latter. After Lehman's bankruptcy, major institutions began to voluntarily cancel the transaction with Morgan Stanley for fear that Morgan Stanley would follow Lehman's footsteps. Passive unwinding is equivalent to surrender in insurance. Default events of reference bonds, such as the takeover of Fannie Mae and Freddie Mac by the government, the bankruptcy of Lehman, the bankruptcy of Washington Mutual Bank and the takeover of three banks in Iceland by the government, are all regarded as default events. All CDS based on these institutional bonds were cancelled, and the insured received compensation from the other party. Another passive liquidation is due to the counterparty's default. Lehman used to be a major market maker in the CDS market, and made millions of over-the-counter transactions with various institutions. It is believed that there are no fewer than 500,000 CDS transactions, and all of them are untied.
Repeated trading means that two counterparties repeatedly buy and sell the same bond insurance at different times. For example, A bought 5 million insurance from B today, and B bought the same amount of insurance from A a few days later at the same premium, so the two transactions are even. Major securities companies regularly cancel these transactions every quarter. The purpose of write-off is to reduce the complicated payment procedures between counterparties, and practitioners in the CDS market hope that write-off can reduce the market size. Excessive CDS scale is considered by the outside world to lead to higher risks and more likely to cause market panic. After Lehman's bankruptcy, the total face value of its bonds CDS was predicted to be 400 billion dollars, and the market fell into a huge panic. But the statistical result is only $72 billion. After repeated transactions were cancelled, the final turnover was only $5.2 billion. If the market knows this data in advance, the history of financial markets after Lehman's bankruptcy will be rewritten.
Reflected by CDS public data
Current financial risk allocation
According to DTCC data, the more debt companies, the more CDS they are cited, and nearly 80% of these transactions are conducted between Wall Street banks. At the same time, the national debt and corporate debt in the reference bond are comparable, which shows that the market is worried about the default of national debt.
According to the total face value of transactions, 65,438+05.4 trillion USD of CDS trading reference bonds are single-country bonds, corporate bonds or asset-backed bonds, and the remaining 65,438+04.8 trillion USD is used to trade various CDS indexes or divide the indexes into various standard index shares according to risks. Due to the standardization of indexes, these indexes and chunks are the most active products in the CDS market. Wall Street investment banks even separate the CDS department that trades single bonds from the department that trades indexes and standard blocks. The former is called the credit flow counter, and the latter is the credit mixing counter. CDS index consists of the most active CDS of the same kind and similar rating, and there are about ten kinds. Each index is updated every six months, and defaulting CDS members are eliminated and replaced by more active members. These indexes include North American high-quality rated corporate bonds (CDX IG), North American low-quality rated corporate bonds (CDX HY), European corporate bonds (ITRAXX Europe), North American asset-backed bonds (ABX), mortgage-backed bonds (CMBX), corporate loan bonds (LCDX), financial industry bonds (finance) and corporate bonds in Japan and Asia except Japan.
According to DTCC data, among the CDS transactions of national debt, the net CDS transaction of Italian national debt was $22.7 billion, with 3,253 transactions. The balance of CDS transactions of Spanish government bonds was $65.438+066 billion, with 654.38+0900 transactions; Brazil's US$ 65.438+0.22 billion exceeded 65.438+00,000 transactions. The following are German11400 million US dollars, Russian 8.3 billion US dollars, Greek 8.2 billion US dollars and Turkish 7.6 billion US dollars. There are $2.9 billion /38 1 transactions in Britain, $654.38+0.60 billion//kloc-0.29 transactions in US Treasury bonds, $654.38+0.90 billion//kloc-0.667 transactions in China, and $65.438+0.80 billion/2997 transactions in Japan. If the repeated transactions were not offset, Turkey won the championship with the total amount of CDS coupons of $6,543.8+$088.6 billion, but after offsetting the repeated transactions, the net amount was $7.6 billion.
Spain's real estate market was depressed, and the national economy was in crisis for the first time in 15. The freezing of the credit market has led to a sharp drop in the share prices of financial institutions. The CDS premium of Spanish government bonds reached an all-time high of 1 12 basis points on October 24th, and reached 47 basis points in early September. 165438+ 10, the closing price was 80 basis points, which was the same as the price of 65438+ 10. The price of Italian 10-year bonds reached 138 basis points on1October 24th and 1 108 basis points on October 5th, which means that the annual premium of guarantee100000 USD is 650.
Among CDS based on corporate bonds, Deutsche Bank, Germany's largest bank, has the highest balance of CDS transactions, reaching $65.438+0.24 billion, followed by General Electric's $654.38+0.2654.38+0 billion, and almost all of them are Wall Street financial institutions. Such as Morgan Stanley ($8.3 billion), Merrill Lynch ($8.2 billion), Goldman Sachs ($6.9 billion), National Mortgage ($6.7 billion), Citigroup ($6 billion), Swiss Bank Credit Suisse Group ($5.8 billion), Barclays Bank ($5.5 billion) and JPMorgan Chase ($5.4 billion). If you don't look at the CDS premium, the ranking of these CDS transaction balances can roughly show the concern of the CDS market about the default of these financial institutions' bonds. The day before Lehman Brothers filed for bankruptcy protection, Merrill Lynch, the third largest investment bank on Wall Street, was acquired by Bank of America in mid-September. The following week, Goldman Sachs and Morgan Stanley, the first and second largest investment banks, were strangled by the stock market and the CDS market and teetered, forcing the Ministry of Finance to issue a $700 billion rescue plan. In the end, the two investment banks simultaneously announced the transformation into bank holding companies within one week, and received 10 from the Ministry of Finance in mid-October. Goldman Sachs is mainly engaged in corporate mergers and acquisitions (M & amp； A) Securities underwriting (ECM, DCM) dropped sharply in 2008. Some Wall Street analysts believe that the bank may suffer its first loss since its listing in the fourth quarter of this year. This week, Goldman Sachs announced that it would lay off 65,438+00%, or about 3,200 people. Morgan Stanley canceled this year's Christmas celebrations. Goldman Sachs and Morgan Stanley1closed at 3 1 1 and 423 basis points on October 5, respectively. After September, the share prices fell by 45% and 53% respectively.
CDS premium is not included in DTCC's public data. The countries with the highest CDS premium of national debt are Iceland, Argentina, Pakistan and Ukraine, and the countries with the safest national debt are Malta, Canada, Germany, the United States, Britain, Japan, France and Finland. The premium of China's five-year national debt is 140 US dollars, which means that the annual premium of China's national debt 100 US dollars is 140 US dollars, which is about four times that of US national debt CDS.