ESMA presents several important findings: only a limited number of funds use CDS; funds that are part of a large group are more likely to use these instruments; fixed-income funds that invest in less liquid markets, and funds that implement hedge-fund strategies, are particularly likely to rely on CDS; and fund size becomes the main driver of net CDS notional exposures when these exposures are particularly large. This article also explores the bond-level drivers of funds’ net single-name CDS positions. We find that CDS positions on investmentgrade sovereign bonds – most of which are from emerging market issuers – tend to be larger. The analysis finally sheds some light on tail-risk from CDS for funds: directional strategy funds that belong to a large group are the most likely to have sell-only CDS exposures, exposing them to significant contingent risk in case of default of the underlying reference entity. Similarly, a number of funds use CDS to build unhedged credit exposure to US non-bank financial issuers.
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