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Credit default swaps activity heats up 

February 8, 2016

Philip Stafford, The Financial Times

Asset managers and hedge funds are reviving a corner of the credit derivatives market, with a record number of cleared trades reflecting higher transactional volume so far this year.

Credit derivatives — tarnished by the financial crisis and a subsequent tougher regulatory regime for banks — are experiencing renewed growth after a long period of decline. Recent market volatility has bolstered their appeal as investors use credit default swaps, which track the likelihood of default of a company, to insure their bond portfolios from specific losses and also implement derivative based trading strategies.

A record $15.7bn in gross notional outstanding positions of single name CDS was cleared by investors during January according to the Intercontinental Exchange, the largest credit derivative clearing house. ICE effectively stands between trades in the market, a process that aims to reduce the counterparty risk of market participants such as banks, asset managers and hedge funds.

ICE said the majority of the volume had come from new business, as opposed to investors pushing longstanding positions through the clearing house for the first time.

The rise in activity comes after a group of 24 big asset managers and hedge funds, including Blue Mountain, Citadel, BlackRock and Anchorage, recently pledged that they would clear their own single name CDS trades in an attempt to bolster trading in the product. Read more

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