ECB official slams ‘opaque’ CDS market after Deutsche Bank’s share price drop
A top official at the European Central Bank (ECB) has slammed the “opaque” nature of the credit default swap (CDS) market, after a sharp jump in prices of Deutsche Bank’s CDS caused the lender’s shares to plummet last Friday.
Responding to a question about the sudden drop in Duetsche’s share price last week, Andrea Enria, chair of the ECB supervisory board, today said: “There are markets like the single-name CDS market which are very opaque, very shallow and very illiquid”.
This means that trades in the market can have a disproportionate impact on the wider market, he said.
“With a few million you can move the CDS spread of a trillion-euro-asset bank and contaminate of course stock prices and possibly also deposit outflows,” Enria told a conference in Frankfurt, according to media reports. “This is something that concerns me a lot”.
A CDS is a financial derivative that allows an investor to swap or offset their credit risk. The price of a CDS rises when a firm is seen as less likely to pay back its debt.
Enria said more should be done to counter the opacity of the market.
“Having these types of markets centrally cleared rather than having over-the-counter, opaque transactions… would already be big progress,” he said.
Enria’s comments came after Deutsche Bank’s shares plummeted some 15 per cent last Friday on the back of the soaring cost of its CDS.
Between Monday and Friday Deutsche Bank’s five year CDS rose from under 100 basis points to more than 200 basis points. The bank’s shares, however, have recovered slightly this week as the CDS price has narrowed.
Bloomberg reported today that a single €5m trade on Deutsche Bank’s junior debt insurance could have been behind Friday’s sell-off.
Citing people familiar with the matter, Bloomberg said regulators have spoken to market participants about the transactions.
There’s no suggestion of any foul play in the trade, Bloomberg reported, and its not clear why the trade was placed.