The top 10 most widely referenced entities within the burgeoning U.S. credit default swap market accounted for 43% of all trades last year, excluding the indices. This is compared with only 27% in 2004, according to Fitch Ratings.
The rating agency attributes the leap in name concentration to the appeal of the volatile auto industry last year; names within that sector made up six out of the top 10 most referenced names. On the other hand, industry concentration within the U.S. synthetic CDO market was substantially lower than the broader CDS market, and the automobile sector was not a favorite among managers.
The rating agency last week found that the CDO sector's structuring and diversification guidelines likely decreased the chance of referencing the same names, as opposed to the single name and other markets. And while Fitch estimates that the number of CDS contracts traded last year grew by 85%, 70% of that growth was attributed to automotive sector, sovereigns and index trades - a trend that a number of industry participants complain has created an uneven balance of liquidity across the CDS market.
Using data from inter dealer brokers GFI Group and Creditex, Fitch found that the number of investors synthetically referencing the same name grew "substantially" last year, with the top 250 most referenced entities accounting for 95% of all trades. However, the highest number of entities referenced within any given week last year was 845 - a 16% increase over the maximum number recorded in 2004. Mean-while, the lowest number of entities referenced over the course of a given week last year was a 21% increase over 2004, at 506.
The rating agency found that 59 of the top 100 most referenced U.S. entities by CDOs were among the top 100 most traded corporate entities. The banking and finance sector continued to be the most referenced within the U.S. synthetic CDO market, according to Fitch. This constitutes 23%, or 1,911 swaps, within the sector - just one percent higher than last year. Not surprisingly, the ailing automobile industry constituted 34% of all U.S. single name CDS activity last year, up from just 12% in 2004. The automobile sector within the CDO space was only referenced 7% of the time, compared with 6% in 2004.
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