February 25, 2014 / 6:36 PM / 6 years ago

Economic growth concerns boost emerging market CDS trading: EMTA

NEW YORK (Reuters) - Investors boosted the use of emerging market credit default swap contracts in the fourth quarter of last year, nearly doubling trading volumes, as concerns grow about economic growth in the developing world, a new survey showed on Tuesday.

According to EMTA, the trade association for the emerging markets, CDS contract trading volumes rose to $276 billion in the fourth quarter versus $142 billion during the same period in 2012, an increase of 94 percent. The increase over the third quarter was 7 percent.

CDS act as a kind of insurance for investors who own debt, in this case debt issued by sovereign nations, against potential default or restructuring.

Full year 2013 trading volume rose to $1.064 billion from $809 billion in 2012, a 31 percent increase as measured in the survey of 12 major dealers.

“Sovereign CDS has increasingly become more widely used as a hedging tool, especially as the EM corporate market has exploded over the last several years. Since those markets do not have a very liquid CDS market, more investors turn to sovereign CDS as a relatively more liquid way of expressing a view,” Jeff Williams, EM Debt Strategist at Citi said in EMTA’s statement.

“Additionally, as more people have become concerned about slowing EM growth and potential asset class outflows, sovereign CDS has been a common tool to express a view, given its better liquidity,” he said.

Trading volumes were largest for Brazilian CDS instruments, rebounding in the fourth quarter to $65 billion from the $51 billion that changed hands in the third quarter.

Mexican CDS contracts were the next largest group with $31 billion in trading volume. Turkish CDS contracts had $29 billion in volume, a drop from the third quarter’s previously reported $34 billion.

Nine corporate CDS contracts were tracked as well.

Mexico’s state-owned oil company, Pemex PEMEXF.UL was the most actively traded, notching $2.6 billion in volume. That is up from the prior quarter’s $1.7 billion in transaction volume.

Pemex swapped places with Russia’s state-owned energy company Gazprom (GAZP.MM), which saw volumes collapse to $2.5 billion in the fourth quarter from $7.5 billion reported in the third quarter.

The CDS trading volumes for Brazilian state-owned oil company Petrobras (PETR4.SA) increased to $1.7 billion, a rebound from the $1.3 billion reported in the third quarter.

Reporting By Daniel Bases; editing by Andrew Hay

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