The prospect for bigger haircuts on Greek government bonds is in the news, and so too is speculation about the CDS market. With that speculation, unfortunately, comes inaccuracies. Once again we will try to set the record straight — this time regarding an opinion piece in the Wall Street Journal online edition by Athanasios Ladopoulos of Swiss Investment Managers.
The article cites a BIS report that “US creditors own just 5 percent of direct exposure to Greek debt. But they are indirectly exposed to at least 43 percent of such debt through CDSs, which total upwards of €25 billion.”
We honestly do not know where these numbers come from. There’s some US$485 billion of Greek debt outstanding. Five percent would be about US$25 billion. But 43 percent would be nearly US$210 billion!
Now compare this to the data at DTCC, which manages the CDS trade information warehouse that captures more than 98 percent of CDS trade volume. The Gross Notional exposure to Greek government bonds through CDS is $75 billion while the Net Notional exposure is a mere $3.7 billion. Which number to use? If Bank A writes protection on Greece for a client for, say, €25 million, and immediately buys protection from Bank B for the same €25 million, it will have Gross Notional exposure of €25 million and Net Notional exposure of zero. The Net Notional exposure of all the participants in the CDS market is $3.7 billion. This is not netted across participants. The longs are $3.7 billion and the shorts are $3.7 billion.
Perhaps Mr. Ladopoulos’ use of the word “indirect” refers to the credit risk creditors face if their counterparties default. Mr. Ladopoulos should then have referred to ISDA’s survey results and other literature. CDS counterparty risk is covered by collateral in almost all circumstances. Our most recent margin survey indicated that collateralization covered 93 percent of CDS transactions and the vast majority of collateral was cash.
We hate to see articles that are not completely researched “stir the pot.” there’s too much at stake for people to keep getting this wrong.