OTC Debrief: Keep Calm and Take Profit

In week 7, from the 12th to 16th of February, the synthetic market kept being nervous but the credit indices have been closing the week at their tightest levels. Investors took profit on their hedges as risky assets recovered across the board. The most liquid indices have traded more than 125% of their open interest, less than previous week. CDXIG529 volumes were half of the previous week’s volumes. The most active index compared to its open interest was the iTraxx Europe Crossover index according to figure 1. There has been a lot of profit taking on the European high yield credit index which has seen the largest reduction of open interest according to figure 2. The very active Emerging Market index was less active compared to last week; this is the first week with a reduction of its open interest while the index cash price is closing the week 1% higher compared to last week.

We introduce a first debrief of the single name data. The analysis is more difficult. LCH CDSClear provides a full granular view per CDS while ICE Clear Credit and ICE Clear Europe provide only an aggregated view at the reference entity level. The open-interest includes a large inventory of off-the-run CDS. The ratio of the traded notional to the open interest is much smaller compared to the ratio using only the on-the-run CDS. During February’s sell-off, from figure 1, we observe that single names have been much less active than the index. The volumes had already increased at the end of January but stabilized in February. For hedging purpose, investors have used liquid indices. Investors have not yet assessed the consequence of the sell-off on each individual reference entity. Figure 2 provides the ratio to the total open interest of entities with an increase or a decrease of their open interest. Similar to the index, the changes are, so far, limited. Looking at reference entities having more than 500MCcy (400 different entities) open interest, the largest reductions of open interest are among the investment grade US entities. Rite Aid Corporation in the US and Akzana in Europe are the two corporates with the largest relative increase of weekly open interest. Both entities are, nevertheless, closing the week close to their end-January levels. We shall enhance this review with a regional and sector approach going forward.