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A Tulip By Any Other Name: What Happened to the Big Bad CDS Market? – ViableMkts

Full Article: ViableMkts

In 2007, the market for Credit Default Swaps (CDS) was on a six year journey from relative obscurity, to being the hottest financial product in the world. The outstanding notional size of the market had grown from less than $1 Trillion in the beginning of 2001, to over $60 Trillion by the end of 2007, with no signs of stopping. Almost ten years later, the outstanding size of the CDS market is hovering just over $10 Trillion, the result of eight consecutive years of decline.

Comments
  • Mustang
    MustangAugust 13, 2016"One of the issues was that it wasn't a proxy for the underlying bonds. News would come out, CDS would blow out 20, 30, 50, 75 (or much more), bonds would be unchanged and then CDS would be flat again. So, what was it really tracking? It very much become the tail that wagged the dog.…"
  • Merlin
    MerlinAugust 13, 2016"Enjoyed the reminder, thanks. Jester seems a little harsh to me.  While much went wrong it seems enough change and innovation has taken place to allow the CDS market to continue to exist.  After all, there are a lot of use cases where utilizing the CDS market allows entities to optimize their risk profiles while meeting client needs. But the history is crazy. Circa 2004, every major financial institution had TENS OF THOUSANDS of unsettled trades on their books.  Not o…"
  • Jester
    JesterAugust 12, 2016"This article is very timely considering CS just sold their CDS portfolio which means yet another market maker is out of the business. At this point, how many dealers are left? GS, JPM, BAML, Citi? Am I missing anyone? Hedging risk must be a real problem when you only have 3 other dealers to turn to as a market maker. What has happened to the CDS market was inevitable because the product evolved to offer no real value to the financial market system. CDS is a financial…"
  • Wolfman
    WolfmanAugust 12, 2016"Great review of the CDS market by someone who was obviously surrounded by,or may have been one of, the key players. I'll talk a cue from the article and reference some great Marlon Brando quotes and oddly enough, it seems that they may apply to the people in the article. Never confuse the size of your paycheck with the size of your talent. The only reason I'm in Hollywood is that I don't have the moral courage to refuse the money. If you want something from an audienc…"

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4 Comments on "A Tulip By Any Other Name: What Happened to the Big Bad CDS Market? – ViableMkts"

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Wolfman
Member
Great review of the CDS market by someone who was obviously surrounded by,or may have been one of, the key players. I’ll talk a cue from the article and reference some great Marlon Brando quotes and oddly enough, it seems that they may apply to the people in the article. Never confuse the size of your paycheck with the size of your talent. The only reason I’m in Hollywood is that I don’t have the moral courage to refuse the money. If you want something from an audience, you give blood to their fantasies. It’s the ultimate hustle. One last… Read more »
Jester
Member
This article is very timely considering CS just sold their CDS portfolio which means yet another market maker is out of the business. At this point, how many dealers are left? GS, JPM, BAML, Citi? Am I missing anyone? Hedging risk must be a real problem when you only have 3 other dealers to turn to as a market maker. What has happened to the CDS market was inevitable because the product evolved to offer no real value to the financial market system. CDS is a financial product that doesn’t finance business, municipalities or governments, so once it stopped performing… Read more »
Merlin
Member
Enjoyed the reminder, thanks. Jester seems a little harsh to me.  While much went wrong it seems enough change and innovation has taken place to allow the CDS market to continue to exist.  After all, there are a lot of use cases where utilizing the CDS market allows entities to optimize their risk profiles while meeting client needs. But the history is crazy. Circa 2004, every major financial institution had TENS OF THOUSANDS of unsettled trades on their books.  Not only that, I would wager less than 10% of CDS traders actually understood what they were trading as they were… Read more »
Mustang
Member

One of the issues was that it wasn’t a proxy for the underlying bonds. News would come out, CDS would blow out 20, 30, 50, 75 (or much more), bonds would be unchanged and then CDS would be flat again. So, what was it really tracking? It very much become the tail that wagged the dog.

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