The Deposit Trust & Clearing Corporation folks do some weekend working debunking myths about credit default swaps (or, as I like to call them, rodents of unusual size). Among other things, the DTCC says that net Lehman-related CDS fund transfers will be closer to $6-billion than the $250 to $400-billion figures that had been bandied about last week. It also says that less than 1% of the CDS contracts extant are directly mortgage related.
I’m going to come back to both of the above later today, because they actually matter in a longer post I am writing, but I was struck by the following claim:
Reported estimates of the size of the credit default swap market have so far been based on surveys. These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side. Thus, when two parties to a single $10 million dollar trade each report their â€œsideâ€ of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract. When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported â€œsidesâ€) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.
Whew, only $34.8-trillion! I feel so much better! (I know, I know, it’s still only notional, but let me briefly enjoy the black humor here of someone implicitly calling $34.8-trillion a less worrisome figure.)