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The DIY way to track derivatives


With all the talk about greater regulation of derivatives, there already is one way for average investors to get a glimpse into this murky world of high finance–although calling it a glimpse might be overstating things.

A three-year-old electronic registry managed by The Depository Trust and Clearing Corporation currently captures information regarding more than 95% of the world’s credit default swap transactions. The DTCC gathers information on the parties to a CDS transaction, the name of the underlying bond that a CDS buyer is obtaining default insurance on, the value of the transaction and the termination date of the trade. 

A CDS, of course, is an insurance-like derivative product that enables a trader to protect himself in the event of a default on a bond. The big controversy with CDS is that a trader need not own the bond to buy this insurance. So in effect, a trader can profit from a company’s default without owning any of its debt–speculate on the prospect of a bankrutpcy is you will.

The DTTC uses all the information it gets on these CDS trades to generate transaction reports called “production-trade warehouse” reports. The trouble is these reports are not available to the public. Regulators get to see them and so do the parties on either side of a CDS transaction. But generally, the only time the public gets to see these transaction reports is when they become the subject of litigation.