Use of credit default swaps by UCITS funds : evidence from EU regulatory data

Using a sample of more than 18,000 Undertakings for Collective Investment in Transferable Securities,or UCITS, this paper aims to provide a first overview of the use of credit default swaps by EU UCITS funds. We show that UCITS funds only account for a small share of the overall EU credit derivatives market. The CDS market is highly concentrated, with thirteen large dealers acting as counterparty to the vast majority of CDS transactions that involve UCITS funds. The use of CDS by UCITS is mainly concentrated in fixed-income funds and funds that rely on so-called alternative strategies. Funds that use CDS tend to be much larger on average. The analysis also reveals three salient features in the UCITS funds’ use of CDS. Firstly, funds with directional strategies, such as fixed-income and allocation funds (ormixed funds), are on aggregate net sellers of CDS. Secondly, a large majority of CDS underlyings are indices, from which funds can gain exposure to multiple entities at once within one sector or region. Lastly, most sovereign single-name CDS are written on emerging market issuers, highlighting the role that these instruments can play in facilitating access to less liquid markets.