ESRB publishes report on credit default swaps (CDS)

The European Systemic Risk Board (ESRB) has today released a report analysing the credit default swaps (CDS) market.

CDSs are contracts used to transfer credit risk between counterparties. Market participants and policymakers widely use CDS spreads to assess credit risk.[1] However, the ESRB analysis reveals imperfections in the single-name CDS market, which should be taken into account when utilising CDS spreads for the assessment of creditworthiness.

First, the formation of CDS spreads is driven by low volumes traded between a limited number of counterparties. High trading concentration also raises concerns about effective market functioning during periods of stress, such as the March 2023 banking turmoil, which is further analysed in a report published today by the International Organization of Securities Commissions.

Second, information asymmetries persist as the single-name CDS market exhibits incomplete post-trade transparency. A large share of CDSs on European sovereigns and on Global Systemically Important Banks are still not subject to real-time public disclosure requirements under the Markets in Financial Instruments Regulation (MiFIR), leaving critical information gaps for market participants and EU authorities.

Furthermore, timely access to high-quality, complete and standardised data remains an essential condition to be achieved for authorities to monitor the CDS market effectively and fulfil their mandates.