The 2005 Scorecard shows that the average number of credit default swap trades executed per month has increased by 89% over the last year. There has also been a marked increase in the volume of credit index trades transacted, with one index trade done for every three single name trades compared to a ratio of one in every eight in 2004.
The section of the Scorecard under most scrutiny this year is the operations summary. The dealers have been under pressure from the Financial Services Authority (FSA) and the Federal Reserve Board (Fed) to improve practices in credit derivatives processing since early 2005.
The Scorecard highlights the significant improvements made in operational infrastructure. The key highlights are:
Â· Nearly three quarters of trades are now covered by International Swaps and Derivatives Association (ISDA) Master Confirmation Agreements, up from 50% a year ago
Â· 100% of top tier firms use the Depository Trust & Clearing Corporation (DTCC) for trade matching, and this figure is 80% across Tier 1, 2 and 3 firms, up from 60% in 2004
Â· Technology investment in operations is up by 32%
Â· There has been significant investment in skilled resources, with the average headcount in credit operations at the major dealers increasing by almost 25% over the last year
Mismatches in reference entity names are no longer a factor in matching and confirmation, following the widespread adoption of Markit RED. However, the Scorecard still shows a high level of confirmable amendments, which does impact the level of outstanding confirmations. Respondents are addressing this through sizeable investment in trade capture systems and more widespread use of the Markit RED Preferred Reference Obligations list.
Another interesting finding was that the May 2005 market correction had a considerable impact on models, product control procedures and reserves. 32% of respondents, for example, amended their CDO models after the May events in the correlation markets.
Penny Davenport, Director of Markit said: "The Markit Scorecard has become an industry benchmark, and is just one strand of our commitment to transparency in the financial markets. We have been pleased to sponsor this initiative for a number of years now, and the value of the benchmarking has been underlined by the monthly collection of key dealer metrics for the Fed."
Jonathan Davies, Partner at Reoch Consulting added: "The latest Scorecard shows that participants in this market are addressing the processing and technology impediments that came to light in 2004. Furthermore, the industry as a whole continues to work together to build an infrastructure which is robust and can become a core component of the global financial markets."