May 14, 2014 / 8:24 PM / 4 years ago

Ukraine crisis spurs 93 percent surge in first-quarter emerging market CDS trade

NEW YORK (Reuters) - Emerging market credit default swap trading volumes surged 93 percent in the first quarter as investors scrambled to protect fixed-income portfolios because of the crisis unfolding between Ukraine and Russia.

Data released on Wednesday from EMTA, the emerging market debt trading and investment industry trade association, showed $409 billion in volume during the first quarter versus $212 billion logged in the same period a year ago.

Compared to the fourth quarter of last year, CDS volumes rose 48 percent.

“The healthy rise of CDS volumes came on the back of an increase seen for market volatility. Excluding China’s new entry, it is notable that half of the nominal volume increase among sovereign contracts was due to Russian trades,” David Spegel, global head of emerging market credit research at BNP Paribas in London said in the EMTA statement.

CDS act as a kind of insurance for investors who own debt, in this case debt issued by sovereign nations, against potential default or restructuring.

Russia’s first quarter CDS contract trading volume of $70 billion represented a 303 percent increase year-on-year and a 215 percent increase over fourth quarter volumes. But Russia was not the largest. Brazilian CDS was the top traded at $72 billion while Turkey was third at $57 billion.

The EMTA data, collected from 12 major dealers, included for the first time CDS contracts on Chinese debt. Excluding that component, volumes rose 77 percent year-on-year, led by a sharp increase in Russian CDS.

According to Spegel, trading of Turkish CDS represented a further third of the increase in sovereign CDS volumes, “likely revealing the impact of investor re-weightings out of Russia and into other EM sovereigns.”

The crisis in Ukraine exploded in February when mass protests ensued a few months after then-Ukrainian President Viktor Yanukovich turned his back on a trade and association agreement with the European Union in order to seek closer economic ties with Russia.

Russia then seized and annexed Ukraine’s Russian-majority Crimea region, citing threats from what it called far-right radicals in the new Kiev government.

Investors looking to protect a $10 million portfolio of Russian sovereign bonds now pay $224,000 annually for five years versus around $128,000 a year ago. Prices reached a 12-month high of $284,000 on April 25, according to data provider Markit.

Nine corporate CDS contracts were also tracked. The highest volume in the survey was that of Russian state-owned energy company Gazprom, at $6 billion, with Brazilian state-owned oil company Petrobras at $2.5 billion and Mexican state-owned oil company Pemex with $1.5 billion in transactions.

Reporting By Daniel Bases; Editing by Chizu Nomiyama

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