European Systemic Risk Board publishes report outlining a medium-term policy roadmap to address single-name CDS market imperfections

The European Systemic Risk Board (ESRB) has published a report analysing the credit default swaps (CDS) market, concluding that imperfections in the single-name CDS segment can hinder effective price discovery and should be taken into account when using CDS spreads to assess creditworthiness. The report also sets out a medium-term policy roadmap aimed at improving market functioning and addressing systemic risks. The ESRB identifies low traded volumes and a limited number of counterparties as key drivers of spread formation, with high concentration raising concerns about market functioning under stress, including during the March 2023 banking turmoil. It also points to persistent information asymmetries due to incomplete post-trade transparency, noting that a large share of CDS on European sovereigns and on Global Systemically Important Banks are not subject to real-time public disclosure requirements under the Markets in Financial Instruments Regulation, creating information gaps for market participants and EU authorities. The report further highlights the tension between globally traded CDS and regulation that remains regional or local, calling for greater cross-jurisdictional cooperation and policy coordination, and proposes measures to improve liquidity, enhance transparency, and strengthen the quality of information reported to authorities.