Most CDS trades may not be suitable for trading on a SEF

The Bank of International Settlements (BIS) today released data covering outstanding positions in the global OTC Derivatives markets.

• Outstanding OTC positions are down some 4% to $583 trillion, although gross market value of existing OTC contracts rose by 15% to $25 trillion

• Notional amounts of Credit Default Swaps (CDS) outstanding declined for the 5th semiannual period (due to terminations of existing contracts).

Interesting to note that for the first time, the BIS has included Central Counterparties (CCP) in the breakdown of outstanding contracts by counterparty for CDS positions.

Further reading (section 3.2 on page 6 of report) shows that CCP accounted for only 11% of outstanding CDS positions. This relatively low figure reflecting the “non-standard” nature of much of the CDS positions captured by the BIS survey.

So, if the vast majority of CDS positions are non-standard, and thus not suitable for clearing by CCP, does that not also imply that the vast majority of CDS trades would  therefore also be exempt from having to trade on a ‘SEF’?

Under the Dodd-Frank legislation, only those OTC derivatives instruments that are centrally cleared, would be required to trade on a SEF.

On that basis, if the vast majority of CDS positions are 'non-standard' (according to BIS data), and thus not suitable for clearing by CCP, does that also imply that the vast majority of CDS trades would be exempt from having to trade on a SEF?

The Dodd Frank legislation defines a SEF as a “Facility, trading system or platform in which multiple participants have the ability to execute or trade Swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce”