Transparency in Credit Default Swap Markets

We provide an inventory of existing forms of transparency in CDS markets and discuss methods that may be used to increase transparency as well as their benefits and costs. In particular, we attempt to identify to whom such benefits and costs accrue (broker-dealers, end users, etc). We argue that increased market transparency has a cost, which must be weighed against its benefits in terms of market quality. Central to the discussion is the impact of transparency and market structure on liquidity: this impact may vary depending on trade size and the degree of information asymmetry across market participants. Insights from market microstructure theory and analogies with other OTC markets, in particular the TRACE system in the corporate bond market, suggest that increased transparency primarily benefits uninformed traders, while informed market participants–large dealers, market makers and some large buy–side firms– are likely to bear its costs. These studies also suggest considering different transparency requirements for large trades. Central clearing and increased reporting of CDS trades to data repositories are important steps towards increased transparency in the CDS market.