NEW YORK Feb 8 Trading in emerging market credit default swap contracts fell 39 percent in the fourth quarter to $142 billion, the result of stricter bank risk limits, rising concerns over the U.S. fiscal cliff and sovereign credit downgrades, a new survey shows.
Data released on Friday by EMTA, the trade association for the emerging markets debt trading and investment industry, showed the 2012 full-year trading volumes fell 23 percent to $809 billion, from $1.054 trillion in the prior year.
Credit default swaps are used by investors to help protect fixed income investments from defaults or restructurings.
"The sharp drop of CDS activity in the fourth quarter of 2012 likely reflected the impact of greater market volatility during the period," said David Spegel, global head of emerging markets strategy at ING Wholesale Banking said.
"We of course also saw the pulling out of major providers of CDS liquidity in the last year as well as banks scaling back on their risk limits. Locking in of performance in this environment before year-end was another factor because people don't necessarily want to transact," Spegel told Reuters.
Fourth quarter CDS volumes dropped by 33 percent versus the $214 billion in third quarter 2012 transactions.
Last October, Swiss banking giant UBS announced it was shuttering its fixed income business and laying off 10,000 employees. UBS was a major liquidity provider to emerging market CDS trading.
Trading volumes may have also dried up as the U.S. government waited until the last moments to strike a deal to avoid going over the fiscal cliff at the start of this year. The deal prevented huge tax hikes and spending cuts that would have punched a $600 billion hole in the economy and could have pushed the world's largest economy into recession.
Credit downgrades of Spain and France's ratings contributed to increased price volatility and uncertainty over Europe's economic trajectory, another potential factor limiting trade.
Brazilian CDS contracts were the most traded with $24 billion in volume, followed by $16 billion for Turkey and $14 billion for Russia.
Spegel said volumes dropped for all countries except for Argentina and Venezuela, due likely to increased political risk concerns.
In Argentina, President Cristina Fernandez faced her first general strike and the increased possibility of a technical default related to the decade-old legal fight with holdout investors from the historic 2002 sovereign default.
In Venezuela, President Hugo Chavez, who has nationalized much of the country, was reelected even while battling an undisclosed cancer in the pelvic region. He has subsequently gone to Cuba for treatment and not been seen or heard from directly since December.
As for corporate CDS, Russia's state-owned energy company Gazprom had the highest reported volume of $1.5 billion while Brazil's state-owned oil company Petrobras had $1 billion in transaction volume.