An Attempt to Decipher What the CDS Index Position Changes Might Mean

 

Asides from the fact that this should be on an exchange, easier to figure out, and be daily here is a cut of what went on in CDS indices last week since suddenly people seem to care.

On the Run Indices

 

It is clear that the activity remained in the on the run indices (series 18 in the U.S. and 17 in Europe). It seems like in spite of high volumes, relatively little changed in terms of positions, with IG18 as the most obvious example where gross increased dramatically but net barely budged. That could be a sign of a lot curve trades, but I guess it is more likely just frantic trading that has left the street in particular with lots of offsetting trades (if this was on an exchange, only curve trades would increase gross without changing net).

It also makes sense that Main had the biggest net change as the focus away from JPM has been on the crisis in Europe. The net change in HY18 is relatively large compared to any of the others.

IG Tranches

 

It is hard to figure out exactly went on since the activity was disproportionately in the tranches. Gross dropped dramatically, and there was a big change in net. We can’t tell which tranches were shrunk. If it was equity or mezz, then some serious risk went out of the system and it is likely JPM unwinding. If it was super senior it was likely unrelated. If JPM, which allegedly had tranches that were “naked” and covered some with trading in the straight index and did some unwinds, it wouldn’t be inconsistent with the data, but all just guesswork.

Away from IG9, it looks like the street did some serious clean-up of old tranches. The gross reductions are pretty large, and even some serious net reductions in series 7 and 6. No idea if it means anything, but does look like tranche exposure everywhere was taken down. Remember, we saw some of this in Europe already last week.

HY and LCDX Tranches

 

Not much activity here though I was surprised to see LCDX9 tranches trade. In terms of what this might mean for JPM, it would be an indication that they kept their alleged HY shorts on. Those have moved in their favor. The CIO office had 3 distinct trades. The AFS book, HY shorts, and IG longs. This looks like they would have kept HY shorts if anything.

Off the Run HY Indices

 

It looks like some serious housecleaning took place. Gross notionals went down dramatically with almost no change in net. No idea if it means anything other than someone spent some time cleaning up their books. It looks like a tri-optima or something was run on these indices.

European Indices

The big changes in European indices seemed to have occurred prior to this week.

What does it all mean?

Who knows? It does mean that a business with such massive notional volumes that impacts the entire financial system shouldn’t be so opaque. Away from that, it is possible JPM closed some of their IG9 position and kept their HY short. It is impossible to tell when or what price any positions would have been closed at or hedges of hedges been entered into. I continue to believe that this story will fade as the position is unwound – the IG long, the HY shorts, and the AFS bonds and the entire position generates some small positive amount (from releasing the money in the bond portfolio). LTRO3 would be great for JPM as they could sell the entire portfolio of bonds to some European bank.

I hope that this latest fiasco pushes regulators to speed up change that should have occurred in 2008, or 2009, or 2010, or 2011.