NEW YORK, May 16 (Reuters) - Emerging market credit default swap trading volumes in the first quarter fell 23 percent compared with the same period a year ago, as Greece’s credit restructuring and anticipated regulatory changes weighed, a survey showed on Wednesday.
Trading volumes for emerging market CDS dropped to $235 billion in the first quarter from $306 billion in the first quarter of 2011, according to EMTA, the trade association for the emerging markets debt trading and investment industry.
CDS are used by investors to help protect fixed-income investments from defaults or restructurings.
A number of factors contributed to the decline, “including speculation that the Greek restructuring might not trigger CDS (which proved false), an expected ban of ‘naked short’ CDS contracts in Europe, and higher standards in capital requirements resulting from anticipated regulatory changes,” Hongtao Jiang, emerging markets strategist at Deutsche Bank, said in EMTA’s statement.
Volumes were down 1 percent from the $234 billion reported in the fourth quarter of last year.
Jiang said historically first-quarter volumes are typically much higher than what is traded in the fourth quarter and the decline confirms a drop in secondary market liquidity for emerging market CDS contracts.
“Such a decline is more pronounced when one considers the record amount of EM hard currency issuance during January and February, and the large amount of short covering and risk-adding activities at the beginning of the year,” Jiang said.
Brazil had the most active CDS trading, with $51 billion in volume. Turkey had $24 billion and Mexico followed with $18 billion in trades.
Russian state-owned energy company Gazprom was the most active corporate CDS contract at $5 billion, while Mexican state-owned oil company Pemex had $1 billion in CDS trades during the quarter.
EMTA said the latest quarterly survey of emerging market CDS trading volumes came from 13 major international banks and broker-dealers.
The survey offers a snapshot of trading volumes by combining data on the notional value of CDS trades and includes rollovers but not netting trades or internal transfers for 19 sovereign and nine corporate credits.