In the face of increased bank turmoil, questions are being asked about the role of credit default swaps (CDS), levels of transparency in this market and whether these products should be cleared. It all feels a bit like 2008, but there are important differences. Following the 2008 crisis, reforms were put in place to ensure that all over-the-counter (OTC) derivatives – including single-name CDS – are reported to regulators via trade repositories, alongside increased clearing of standardized derivatives. These rules mean single-name CDS, which play an important role in managing risk, are much more transparent.

The regulations are now well bedded in – for example, 18 of 20 Group-of-20 countries have trade reporting rules for CDS (and other OTC derivatives), which oblige counterparties to report key details of all their trades to regulators via trade repositories.

In addition, the Depository Trust & Clearing Corporation’s (DTCC) Trade Information Warehouse – a centralized electronic database that holds the most current details for virtually all cleared and bilateral CDS contracts globally – contains information for more than 50,000 accounts, representing derivatives counterparties across 95 countries. CDS transaction and pricing information is also available at the DTCC’s real-time SDR dashboard.

Far from being opaque, regulators now have access to data showing who is trading what, when and in what size.

Efforts are currently underway to harmonize data reporting rules across jurisdictions, providing regulators with better quality, more consistent data sets – an initiative that ISDA has long supported.

Likewise, clearing is much more prevalent than it was in 2008. According to ISDA SwapsInfo, which uses data from the DTCC swap data repository (SDR), 83.7% of total credit derivatives traded notional required to be reported under the Commodity Futures Trading Commission’s reporting rules was cleared in 2022.

This data largely covers CDS indices, but clearing of single names is also available at LCH’s CDSClear and ICE Clear Credit. For example, LCH offers clearing in over 300 European corporate names, including financials like Barclays, BNP Paribas, Credit Suisse, Deutsche Bank and HSBC. According to ISDA analysis based on data from the DTCC SDR, 58.7% of corporate single-name CDS traded notional required to be reported under the US Securities and Exchange Commission’s security-based swap data reporting rules was cleared in the week ending March 24, 2023.

Overall, the credit derivatives market is smaller now than it was before the 2008 crisis. According to data from the Bank for International Settlements, the gross market exposure of credit derivatives was $247 billion at the end of June 2022 versus $5.4 trillion at the end of 2008. Despite its smaller size, the credit derivatives market continues to play a critical role, particularly during times of volatility, as it enables firms to customize and hedge their exposure to individual credits or sectors.

Industry participants have worked hard to meet transparency requirements to ensure regulators have the information they need to effectively oversee derivatives markets. Firms have also embraced central clearing as a means of mitigating counterparty credit risk. We’ve come a long, long way from 2008.