Depository Trust and Clearing Corporation


This is something I didn't know: and it appears that most writers for the financial press didn't know this either. The credit default swap market is not some vast swamp of toxic unknowns, rather, it does indeed have a clearing house and tabs are indeed kept on who holds what and owes to whom. This is done by the Deposit Trust and Clearing Corporation and their straightening out of some misconceptions is here.

Since it was set up in November 2006 the vast majority of CDS contracts have been registered: and the major players have back registered those contracts they wrote before this date as well. The number of such swaps that relate directly to mortgages are under 1% of the outstanding market and that market has a nominal value of $35 trillion or so, down $10 trillion from earlier this year.

But the two most important things I take away from their statement is that, firstly, we do know (or, rather, someone knows, which is good enough) who owes what, where. Secondly, that net exposure is a great deal less than gross (as of course we would expect it to be).

The payment calculations so far performed by the DTCC Trade Information Warehouse relating to the Lehman Brothers bankruptcy indicate that the net funds transfers from net sellers of protection to net buyers of protection are expected to be in the $6 billion range (in U.S. dollar equivalents).

That $6 billion compares to the gross contracts outstanding on the same CDS contracts of some $440 billion. If we run the same percentage against the total market we'd have net payments of some $750 billion.

It's an interesting measure of how things have changed in the past couple of weeks that I originally wrote "only $750 billion" and was quite relieved. Actually, about the only thing that I know about that number is that it's wrong in detail but it seems to be correct in order of magnitude.

No, of course this doesn't mean that everything is going to be peachy, most certainly not. But it is a sum that can actually be dealt with, it's of the order of 1-2% of world GDP for example. Oddly, about the same percentage that the climate change worriers tell us we need to spend to avoid disaster in 2100 and beyond.

You can call me selfish if you wish but I think I'd rather we sorted out the banking system first: after all, we can always start on the CO2 next year and that'll be a great deal easier if we do still have a banking system, won't it?