Our own bank Call Reports indicate that late last year U.S. commercial banks held credit derivatives with notional values of more than $ billion, which may represent one-third of the global market. Trading of these instruments occurs mostly among some 1,200 large investment-grade “reference entities,” with more liquidity, of course, among the most active fifty names than among the next several hundred.
Most liquidity for CDS contracts is with five-year maturities, although participants are trying to expand market depth at longer terms. There are also efforts to push demand beyond investment-grade corporate names, for example to high-yield and middle-market sectors. A key question - how much risk is being transferred?