ESRB and IOSCO publish final reports analysing credit default swaps market

The European Systemic Risk Board (ESRB) has published a report analysing the credit default swaps (CDS) market, with a particular focus on single-name CDSs in terms of their market structure and current regulatory framework. The report evaluates the EU regulatory framework for CDSs and the functioning of the CDS market in light of recent derivatives market instability, notably the March 2023 banking turmoil. The ESRB identifies key vulnerabilities and calls for improved data quality, enhanced transparency, and greater cross-border regulatory co-ordination. To address these issues, it sets out a medium-term policy roadmap aimed at improving the functioning of the single-name CDS market and addressing systemic risks.

Key proposals include:

• Enhancing post-trade market transparency for single-name CDSs.
• Strengthening supervisory access to information through improved quality and standardisation of data reported as well as through enhanced global co-operation.
• Promoting the efficiency and functioning of the single-name CDS market.
• Improving credit risk assessment frameworks by reducing excessive reliance on CDS spreads and raising awareness of the price formation mechanisms.

On the same day, the International Organization of Securities Commissions (IOSCO) has also published its final report examining the single-name CDS market from a global perspective. The report assesses current levels of post-trade transparency in member jurisdictions, explores potential measures to encourage greater post-trade transparency, and considers the advantages and disadvantages of these measures. The report also considers the impact of the liquidity crisis that affected the banking industry in March 2023 on the single-name CDS markets.

The report finds that the response to these events was an increase in activity in the CDS market, as participants sought to hedge their portfolios amid a climate of uncertainty and market stress. The increase in the level of activity in a market that generally has low levels of liquidity likely led to a rise in CDS spreads of banks. The increase in CDS spreads, coupled with the decline in equity prices, served as indicators of heightened stress. The report does not find evidence of causation between sharp movements in the prices of single-name CDSs and the subsequent sudden drop in the shares of certain banks at the time. IOSCO concludes the report by encouraging each member jurisdiction to take steps toward enhancing post-trade transparency in the single-name CDS market in its jurisdiction should they conclude that such efforts would not have a substantial negative effect on market risk exposure or market activity.

Return to main website.