CDS deal volume up, backlog down in Sept -Markit

LONDON, Oct 17 (Reuters) - The average deal volume of major dealers in the credit derivatives market rose in September, while the backlog in confirming trades aged over 30 days fell to at least an 18-month low, a report from market information group Markit showed.

Average credit default swap (CDS) transactions per dealer rose to about 25,000 deals, about the same as in March 2008 and near the all-time high of around 26,000 in August 2007, from 15,000 in August, according to graphs in a quarterly report published on the Markit Web site on Friday.

Both in the month of September, with the collapse of central CDS dealer Lehman Brothers, and in March, with the rescue of dealer Bear Stearns, fears were heightened that the financial system could melt down.

The Markit graphs show that investors and banks were able to use the $54.6 trillion CDS market in these periods of extreme financial stress as a tool to hedge their credit exposures.

In October, however, traders say that volumes have dropped off as dealers have been reluctant to increase their exposure to some other bank counterparties after taking losses on Lehman. Markit numbers for this month are not due until mid-January.

No one at Markit was immediately available to comment on whether the per-dealer volume figures were affected by the demise of dealers Lehman and Bear Stearns.

The backlog in trade confirmations aged over 30 days, meanwhile, fell to about 0.3 business days in September, continuing a downtrend from April, a Markit graph showed.

Backlogs in confirmations are typically used as an indicator of the market's vulnerability to a breakdown.

This figure is calculated by dividing the number of confirmations outstanding by more than 30 days in a month by total deal volume and multiplying by the number of business days in that month.

At end-July 2008 in a letter to the New York Federal Reserve, CDS dealers and industry organisations agreed to a set of targets to make market operations more efficient, including a commitment that trades unconfirmed over 30 days would not exceed one business day of trading volume.

The average of all outstanding confirmations per dealer rose to nearly 4,000 in September after falling below 2,000 in August. These levels are down from a high of 10,000 in August 2007 and about the same as in late 2006 and early 2007 before the credit crisis.

In contrast with previous reports, Markit provided a more detailed graph for the 30-day figure but gave no graph for the business day backlog for all oustanding confirmations.

In September 2005 after backlogs reached as long as 90 days, the New York Fed called major dealers to a meeting to improve market practices to clear trades faster and reduce the backlog.

The growth of the CDS market in the credit crisis has since put pressure on banks' back offices to keep up with the increase in volumes.

The average number of pre-netted settlements per dealer continued an upward trend in September to around 300,000, a Markit graph showed. The volume of netted settlements per dealer, after offsetting trades cancel each other out, rose slightly to more than 25,000 in September.

(For a factbox on the CDS market, click on [ID:nLH441022] )