A 5 million bet caused the collapse of Deutsche Bank
A single purchase of Cds for an equivalent of 5 million euros would have unleashed last Friday’s avalanche on Deutsche Bank. Which in turn led to a capitalization loss of 1.6 billion for the German bank and of 30 billion on the index of European banks. The agency reports it Bloomberg, citing anonymous sources. According to the agency, the market control authorities would have requested clarifications on the transaction to the various operators of the CDS market.
What are CDs
I Credit default swap o CDS are financial contracts that in fact allow the buyer to earn from a possible default of a given issuer. They are generally used as a sort of “insurance“, to limit the possible losses of a larger exposure in other instruments of the same issuer. Although the CDS on Deutsche Bank represent a important slice CDS on corporate issuers, the market for these instruments is extremely illiquid. A single trading of large dimensions, such as the one that would have occurred on Friday morning, may therefore be sufficient to cause prices to rise abnormally.
In particular, it reports Bloombergthe contract that would be at the center of the investigations by the authorities would concern the protection on the default of the subordinated debt the Deutsche Bank. It is not clear who was the buyer or the seller, writes the agency.
Opaque and illiquid market
He intervened today on the opacity of the CDS market Andrea Enriathe number one of Supervisory board of the ECB. Enria’s intervention is probably anything but casual, in the light of the findings of Bloomberg. “There are markets like that of CDS which are a lot opaqueVery superficial it’s a lot illiquid“, he said. He added that opaque trading in CDS is hurting the price of bank shares and may trigger a flight from deposits. “With a few million you can move the spread of the CDs” of one big bench “and also taint the share price and possibly also i deposit outflows“, said the president, without naming the banks.
Enria: rules are needed
Enria said the Financial Stability Board it could overhaul the way the CDS market works. Meanwhile, improving information on operations involving these tools could be a better path than bans or new rules. “If you have one good transparencyfor example if these markets were centrally controlled instead of having opaque over the counter transactions where you don’t know who is trading, I think that would already be a good progress“, he concluded.