SG pull-back poses questions for CDS market

IFR 2303 - 05 Oct 2019 - 11 Oct 2019
4 min read
Christopher Whittall

Societe Generale is paring back credit-default swap trading as part of the overhaul of its investment bank, a move that is sending ripples through the credit derivatives industry where the French lender played an important role until recently.

SG announced 1,600 job cuts earlier this year and pledged to restructure its fixed-income unit after poor results, with senior management indicating it would focus less on “flow” trading of standardised products.

The bank’s credit-trading desk is one area where it is scaling back. SG will continue to trade CDS, but it has become more selective in terms of the sectors and clients it targets, according to people familiar with the matter. In one telling sign, Hussein Dbouk, global head of flow credit trading, has been put at risk of redundancy after less than a year at the bank.

SG’s pullback has ramifications for the wider market after the bank ended many years of involvement with the Credit Determinations Committee, an industry body tasked with ruling on CDS events, earlier this year.

In an unprecedented development, the committee has failed to find a replacement since SG quit the panel in May. That raises questions about the future structure of a body that is central to the functioning of the credit derivatives market, but has frequently attracted controversy over the years.

"It's surprising that they wouldn't be replaced. It's definitely a potential issue," said Athanassios Diplas, one of the architects of the Determinations Committee, who is now principal at Diplas Advisors.

"If you don’t have enough people, that could be problematic."


Credit-default swaps are derivatives contracts that allow traders to bet on whether a company will default on its debt. When companies run into trouble, the Determinations Committee convenes to rule whether CDS will trigger payouts to protection holders.

The committee traditionally compromises 10 banks and five investors, with a majority of 80% needed for a decision to be carried. Banks are assigned positions on the committee based on CDS trading volumes.

That set-up allowing the largest CDS traders to rule on events has prompted allegations of conflicts of interest over the years, particularly when the committee fails to reach a unanimous decision.

SG has been involved with the panel on and off since at least 2009, according to documents on the Determination Committee's website, either as a voting member or in a consultative role. Even so, SG has never shifted the kind of CDS volumes of some of its larger peers in the market.

Firms such as Royal Bank of Scotland and UBS left the committee several years ago after scaling back in CDS trading.

But while members have quit in the past, this appears to be the first time the committee has not had a full contingent for an extended period of time since the International Swaps and Derivatives Association began publishing membership lists in 2009.

ISDA, the derivatives trade body, appointed DC Administration Services to act as secretary to the committee in October last year. DCAS didn't respond to repeated requests for comment.

Diplas said the make-up the panel generally doesn't matter when it comes to straightforward decisions. "The ratios matter when you have a specific disagreement," he said.

Another CDS market expert suggested that reputational risks associated with sitting on the Determinations Committee may explain the difficulty in filling the gap on the panel.

“It could very well be that the banks are starting to feel that they don’t want to be on it, taking these decisions. That would suggest we would need some sort of restructuring [of the committee],” the expert said.

The Determinations Committee has received a number of questions since SG left in May. In one example of the kind of confusion that the complexities of CDS can cause, the committee recently ruled that some (though not all) CDS contracts would trigger after travel company Thomas Cook went bankrupt in September, potentially leaving some protection holders out of pocket.