Index CDS Dynamics during the Market Stress of 2020.

Using CFTC's regulatory data that includes identities of all market participants, we study the dynamics of single-name and index credit default swaps (CDS) leading up to, during, and in the aftermath of the COVID-related financial markets turmoil of 2020. The study reports volume and directionality of trades and positions of major market participants detailed by product and firm type. Among the findings of the study are five key stylized facts. First, gross notional in the standard CDS indices nearly doubled by mid-March 2020, while non-standard indices and single-name CDS remained largely at the pre-COVID levels. Second, hedge funds and asset managers were the most active client sectors in absolute terms; insurance companies and pension funds showed significant relative movements. Third, CDS volume traded during the COVID period increased more in relative terms than the volume of other derivatives, including interest rate swaps and currency swaps. Fourth, US and European investment-grade indices were the most heavily traded indices during the market stress of 2020, while high-yield indices accounted for a much smaller share of market activity. Fifth, swap dealers more than doubled their standard index positions in March 2020, and this movement accounted for more than 85% of the total increase in positions across all market participants. Our regression analysis indicates that the dynamics of asset managers', banks', and pensions funds' positions is consistent with hedging; we also report evidence that positions held by hedge funds, insurance companies, and a category that includes sovereign wealth funds, central banks, and corporations may be partially attributed to speculative activity. [ABSTRACT FROM AUTHOR]