At the peak of the housing-related financial bubble, banks had grown all too dependent on credit default swaps (CDS). The problem was that times were so good, few had the ability or inclination to sit back and see that the good times couldn't last. Trading in CDSs has tumbled 40 to 50 percent at the big Wall Street firms, Bloomberg reports. At other places, the business may be essentially gone.
The idea of a CDS trader seems much less glamorous now, as layoffs have decimated the ranks, and the rocket scientists have moved on, bent on finding the next cash cow. The business isn't likely to go away completely. But it will take some readjustment as new clearing rules come on line, and more swap execution facilities rise.
Most are betting that interest rate swaps will emerge as the main swap vehicle. While the CDSs on CDOs may be all but gone, the idea of being able to bet on specific bonds and bond indexes remains strong. Bloomberg suggests the idea of trading traditional futures on credit indexes is taking root, noting that Goldman Sachs, Deutsche Bank, Morgan Stanley and Barclays are among dealers coordinating with Markit to potentially offer exchange-traded futures linked to the firm's CDX indexes. Are single bond futures in the works?
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