05 October 2016 by lberuti
Because of the sheer size of their outstanding debt and their importance as trading counterparties, the financial sector has always been the most actively traded, after sovereigns, as far as Credit Default Swaps (CDS) are concerned. Since the beginning of the year, traded volumes on CDS of financial institutions represent 40% of the total of CDS traded on European corporate entities. That percentage has been fairly stable, even since mid-September when the whole DB’s ( Deutsche Bank AG ) angst started. What has not been stable though is the share of that volume represented by trades on DB’s CDS. It has exploded. While during that period, volumes traded on DB’s stock have roughly doubled, the notional of CDS has increased 10 folds. More than $500mln worth of 5-year CDS were exchanged every single day of last week. If the 5-year risk premium has come down compared with its peak a couple of weeks ago, these volumes tell you that risk managers are taking the damage to DB’s financial health which a jumbo fine would cause very seriously.