TEXT-Fitch: Sovereigns lead global CDS liquidity decline

Wed Nov 21, 2012 4:19am EST

Nov 21 - Fitch Solutions says that global CDS liquidity has steadily declined since the end of July, with Fitch's global index closing at 9.09 as of Friday's market close compared to 8.81. on 31 July (the lower the score the higher the CDS liquidity).

This has been driven by the sovereign sector, where both Fitch's developed and emerging market indices have experienced the biggest falls in liquidity, moving from 7.55 to 8.17 and 7.6 to 8.3 respectively since mid-summer. This in turn has also made sovereigns the fastest liquidity faller of any global sector.

Part of the overall global liquidity decline may be due to the short selling ban on European sovereigns which came into effect on 1 November. Comparing publically available trade data from The Depository Trust & Clearing Corporation (DTCC) from the week ending 18 November with the same period a year earlier shows that European sovereign net notionals as a percentage of gross notionals have reduced on average by 16% over the year. This suggests that dealers may have been closing out short positions post the ban coming into place.

However, as liquidity across the whole of the global CDS market is also showing a slow decline, the short selling ban is unlikely to be the main contributing factor to this broader trend.

The full Fitch Solutions' Global CDS liquidity scores commentary, which covers the top five most liquid CDS corporate names in Europe, North America and Asia, as well as the top five most liquid global sovereigns, is available at www.fitchratings.com under - "Fitch Solutions' Global Liquidity Scores Commentary Issue 69"

In general, the liquidity of a credit derivative asset increases when it is showing signs of financial stress in combination with a significant amount of debt outstanding and/or changes in its capital structure, including new issuance. The liquidity scores of assets have historically traded between 4 at the most liquid end, through to 29 at the least liquid end. Entities also tend to be more liquid when there is agreement about present value but disagreement about future value due to heightened uncertainty surrounding the entity.

Link to Fitch Solutions' Report: Fitch Solutions' Global CDS Liquidity Scores Commentary - Issue 69

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