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Use of credit default swaps by UCITS funds: evidence from EU regulatory data

Author

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  • Guagliano, Claudia
  • Mazzacurati, Julien
  • Kenny, Oisin
  • Braunsteffer, Achim

Abstract

Using a sample of more than 18,000 Undertakings for Collective Investment in Transferable Securities,or UCITS, this paper aims to provide a first overview of the use of credit default swaps by EU UCITSfunds. We show that UCITS funds only account for a small share of the overall EU credit derivativesmarket. The CDS market is highly concentrated, with thirteen large dealers acting as counterparty to thevast majority of CDS transactions that involve UCITS funds. The use of CDS by UCITS is mainlyconcentrated in fixed-income funds and funds that rely on so-called alternative strategies. Funds that useCDS tend to be much larger on average. The analysis also reveals three salient features in the UCITSfunds’ use of CDS. Firstly, funds with directional strategies, such as fixed-income and allocation funds (ormixed funds), are on aggregate net sellers of CDS. Secondly, a large majority of CDS underlyings areindices, from which funds can gain exposure to multiple entities at once within one sector or region.Lastly, most sovereign single-name CDS are written on emerging market issuers, highlighting the rolethat these instruments can play in facilitating access to less liquid markets. JEL Classification: F30, G10, G15, G23

Suggested Citation

  • Guagliano, Claudia & Mazzacurati, Julien & Kenny, Oisin & Braunsteffer, Achim, 2019. "Use of credit default swaps by UCITS funds: evidence from EU regulatory data," ESRB Working Paper Series 95, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:201995
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    File URL: https://www.esrb.europa.eu//pub/pdf/wp/esrb.wp95~4ce4d43515.en.pdf
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    References listed on IDEAS

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    1. Kitty Moloney & Oisin Kenny & Neill Killeen, 2016. "Network analysis using EMIR credit default swap data: micro-level evidence from Irish-domiciled special purpose vehicles (SPVs)," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.
    2. Godfrey, Brian & Killeen, Neill & Moloney, Kitty, 2015. "Data Gaps and Shadow Banking:Profiling Special Purpose Vehicles’Activities in Ireland," Quarterly Bulletin Articles, Central Bank of Ireland, pages 48-60, July.
    3. Jennifer Lynch Koski & Jeffrey Pontiff, 1999. "How Are Derivatives Used? Evidence from the Mutual Fund Industry," Journal of Finance, American Finance Association, vol. 54(2), pages 791-816, April.
    4. Nijskens, Rob & Wagner, Wolf, 2011. "Credit risk transfer activities and systemic risk: How banks became less risky individually but posed greater risks to the financial system at the same time," Journal of Banking & Finance, Elsevier, vol. 35(6), pages 1391-1398, June.
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    Cited by:

    1. Lannoo, Karel & Thomadakis, Apostolos, 2020. "Derivatives in Sustainable Finance," ECMI Papers 29791, Centre for European Policy Studies.
    2. Jukonis, Audrius & Letizia, Elisa & Rousová, Linda, 2022. "The impact of derivatives collateralisation on liquidity risk: evidence from the investment fund sector," Working Paper Series 2756, European Central Bank.

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    More about this item

    Keywords

    credit default swaps; derivatives; investment funds; synthetic leverage;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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