Back in 2009, Deutsche Bank salesman J.P. Rorech was the CDS salesman who, alongside Millennium PM Renato Negrin, were the first two traders accused by the SEC of insider trading using Credit Default Swaps, a product which many then said the SEC has no jurisdiction over as it is a “security-based swap” transaction (an umbrella loophole which was subsequently revised). The insider trading charge was subsequently dropped after the SEC was unable to provide sufficient proof the two had colluded “off the record” in purchasing VNU CDS on material non-public info, but the stigma may have stuck.
And while it is not clear if that particular incident is what the bank with the world’s greatest amount of outstanding notional derivatives was concerned about, or whether the ongoing collapse in bond market liquidity was the factor but moments ago, Bloomberg released a stunning update that Europe’s largest bank is exiting the single-name, both IG and HY, CDS product line, which for years was one of its biggest revenue generators and a product in which DB was for a long time one of the best and deepest CDS trade axes.
As Bloomberg reports, Deutsche Bank AG will stop trading investment-grade and high-yield credit default swaps on single credits and will instead focus on trading corporate bonds, according to a spokeswoman.
“Deutsche Bank is redeploying resources and capital into credit cash trading,” Michele Allison, a spokeswoman for the Frankfurt-based bank, said today.
The company will continue trading credit indexes and single-name CDS tied to distressed or emerging market debt, Allison said.
Of course, the very reason why banks moved from cash to CDS trading in the mid-2000s is because the cash liquidity was never high enough to allow massive profits for most entities involved. That, and that the collateral posted when trading credit via CDS was negligible as compared to actually having to own the underlying bond.
And with that, the CDS market just lost one of its key pillars of liquidity. Should other banks follow suit and stop making markets in CDS, watch as trading in CDS (so profitable due to its OTC nature, where dealers make big profits on the bid/ask spread), trickles to a halt, and as one after another TBTF bank warn their FICC revenue in the coming quarters is about to timble.
Finally, one can’t help but wonder: is a massive CDS-market rigging settlement about to be unveiled?
via Zero Hedge http://ift.tt/1A7Vkvs Tyler Durden