August 12, 2013 / 10:57 PM / 4 years ago

Emerging market CDS trade volume up globally; Europe drops in Q2

NEW YORK, Aug 12 (Reuters) - Emerging market credit default swap contract trading volume rose 28 percent to $279 billion in the second quarter, driven by increases in Asia and Latin America, according to a survey by EMTA, the trade association for the emerging markets, released on Monday.

The overall increase hid the impact of the European Union's "attempt to ban speculative CDS trading by prohibiting naked sovereign CDS, which came into effect in November 2012," Jane Brauer, director and senior quantitative strategist at Bank of America Merrill Lynch, said in an EMTA statement.

Brauer said CDS trading volumes in European Union countries fell approximately 80 percent compared to the same period a year ago.

The poll of 13 major dealers, which included one new reporting member in the second quarter, showed volumes overall increased by 31 percent from the $212 billion reported in the first quarter of this year.

Brauer said the increase in Asian and Latin American CDS volumes reflected "perceptions that EM country risk has increased due to (quantitative easing) fears; this has served to increase demand for CDS from both hedgers and speculators."

In May, U.S. Federal Reserve Chairman Ben Bernanke first hinted at reducing the $85 billion in monthly U.S. bond purchases that are geared toward keeping interest rates low in order to spur borrowing and investment.

In anticipation of the drop in QE funding levels, developed-market interest rates have risen, eroding the yield advantage held by high-risk emerging market assets.

Among the 19 nations with emerging market CDS trading, Brazil was the largest with $65 billion in turnover, followed by $33 billion in Turkey and $32 billion in Mexico.

Nine corporate CDS contracts were tracked as well, with Russian state-owned energy company Gazprom showing the most turnover at $2.7 billion. Mexican state-owned energy company Pemex at $2.3 billion, and Brazilian state-run energy company Petrobras at $1.6 billion. (Reporting by Daniel Bases; Editing by Leslie Adler)

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