ESMA workshop on shorttermism Paris September 16 2019 Andy Hill Senior Director ICMA ESMA workshop on shorttermism Use of CDS by investment funds A tool for credit risk management Facilitating supply of credit to the market ID: 1028357
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1. Use of CDS by investment fundsESMA workshop on short-termism, Paris, September 16 2019Andy Hill, Senior Director, ICMA
2. ESMA workshop on short-termism: Use of CDS by investment fundsA tool for credit risk managementFacilitating supply of credit to the marketPrice discovery Synthetic bond investmentISDA (2016), Single-name Credit Default Swaps: A Review of the Empirical Academic LiteraturePotential benefits of CDS
3. ESMA workshop on short-termism: Use of CDS by investment fundsIncreased risk-taking and diminished monitoring (by banks)Empty creditors and negative economic interestsExcessive volatility / speculationSystemic riskISDA (2016), Single-name Credit Default Swaps: A Review of the Empirical Academic LiteraturePotential costs of CDS
4. ESMA workshop on short-termism: Use of CDS by investment fundsRisk management / hedgingAlternative liquidityDigesting inflowsInvestment strategies:Basis tradesCurve tradesSkewAnother ‘tool in the toolbox’ICMA (2018), The European Corporate Single Name Credit Default Swap MarketUses of CDS by investment funds
5. ESMA workshop on short-termism: Use of CDS by investment funds7% of UCITS funds (sample >18,500) use CDSCombined €387bn gross notional (<5% of EU CDS market)Main types of users are fixed income funds and alternative fundsAround two thirds of UCITS gross CDS notional is based on CDS indices, and a third on single name CDSFor SN-CDS: 39% NFCs; 30% sovereign (mainly EM)UCITS funds rely on CDS for multiple purposesTend to be aggregate sellers ( =>long exposure / better liquidity)Portfolio diversity (indices)Basis “Further research is needed”ESRB (2019), Use of credit default swaps by UCITS funds: evidence from EU regulatory dataUses of CDS by investment funds - evidence
6. ESMA workshop on short-termism: Use of CDS by investment fundsCalice, G., and Adesina, T., 2018, “Large, Global Asset Management Firms and the Credit Default Swap Market”, EFAMA Czech, R., 2019, “Credit default swaps and corporate bond trading”, Bank of England, Staff Working Paper No.810, JulyDuffie, D., 2010, “Is There a Case for Banning Short Speculation in Sovereign Bond Markets?” Banque de France Financial Stability Review No. 14 (July)Duffie, D., and Zhou,C., 2001, “Credit derivatives in banking: useful tools for managing risk?” Journal of Monetary Economics, No. 48ESRB, 2019, “Use of credit default swaps by UCITS funds: evidence from EU regulatory data”Hakenes, H., and Schnabel, I., 2010, “Credit Risk Transfer and Bank Competition”, Journal of Financial Intermediation Vol. 19Hu, H. T. C., and B. Black. 2008, “Debt, Equity and Hybrid Decoupling: Governance and Systemic Risk Implications”, European Financial Management Vol. 14, No. 4Hu, H. T. C., and B. Black, 2008, “Equity and Debt Decoupling and Empty Voting II: Importance and Extensions”, University of Pennsylvania Law Review Vol. 156, No. 3 (January)ICMA, 2018, “The European Corporate Single Name Credit Default Swap Market”ISDA, 2016, “Single-name Credit Default Swaps: A Review of the Empirical Academic Literature”References