Journal of Financial Market Infrastructures

Credit default swap market retrospective: observations from the 2008–9 financial crisis and the onset of the Covid-19 pandemic

Stanislav Ivanov, Richard Jordan and Ian Springle

  • Spread levels for the main credit indices approximately tripled during March 2020 from their February 2020 levels. During this period the S&P 500 and EURO STOXX 50 indices exhibited precipitous corrections exceeding 30% off their January levels. Covid-19 peak daily volatility estimates for credit indices were significantly higher than their Financial Crisis analogues. VIX levels were very similar for the Covid-19 and Financial Crisis periods. 
  • During the first half of 2020, global credit markets exhibited a high degree of concordant behavior. The strongly discordant relationship between credit and equity markets, combined with a deep five-year on-the-run credit index market, provided an efficient use of credit indices and credit index options for improved portfolio construction and risk management.
  • During the onset of Covid-19, ICE Clear Credit experienced an extended period of approximately 25 consecutive business days where daily cleared notional amounts remained over $200 billion, with an average exceeding $300 billion. This compares to a pre Covid-19 average of $80 billion.

Global credit default swap (CDS) markets experienced unprecedented whipsaw spread realizations during March and April 2020. While the main source of market uncertainty was the Covid-19 pandemic, the March 2020 oil price war between Saudi Arabia and Russia added “fuel to the fire”. In this paper credit market fluctuations, measured by the levels of the main and most heavily traded index instruments, are analyzed and compared with the analogous index realizations during the 2008–9 financial crisis. The Covid-19 credit market fluctuations exceeded those during the financial crisis in terms of daily amplitudes and the rates at which spread tightening followed the initial spread widening. The fast-moving credit markets led to record index trading and clearing activity at all three major CDS clearinghouses. Clearinghouse volumes and general clearing trends during the onset of the Covid-19 pandemic are presented in the context of the observed explosion in market volatility. The continuous development and investment in central clearing over the last 10 years greatly contributed to the financial stability of the CDS markets during the Covid-19 crisis, providing increased market transparency, capital efficiency and robust risk management services in the presence of record daily volumes, open interest levels and mark-to-market payments.

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