In non-cleared CDS contracts, a single risk-holder bears the impact of loss upon a credit event. The cost of protecting against that risk has continued to increase – causing single-name protection to now be available for less than 200 issuer names.
Centrally-cleared CDS protection is an alternative, but the related risk is concentrated among a small number of clearing members. The resulting higher cost of the CCP model has not proven appealing to most market participants.
The prolonged era of low credit yields has intensified the need for life insurers, pension funds and other institutional fixed income investors to lower their capital costs and seek alternative sources of yield.
Capital requirements and inventory holding costs have increased for dealers – reducing their ability to provide on-demand liquidity to investors.