Back in September 2005, Tim Geithner summoned the so-called Fourteen Families (i.e., the fourteen major dealer banks) to the New York Fed to discuss the horrendous state of the infrastructure in the credit derivatives market. In particular, Geithner was concerned about the enormous backlog of unexecuted confirmations—essentially, backlogs of CDS trades that banks hadn't gotten around to formally completing yet. In a crisis, the legal risks posed by huge backlogs of unexecuted confirmations would create a considerable amount of uncertainty, which could potentially cause the CDS market to freeze up, further exacerbating the crisis. Geithner worked tirelessly to improve the infrastructure in the CDS market, and to bring down the backlogs of unexecuted confirmations. How successful was he? Very:
Unexecuted confirmations in dealer portfolios aged more than 30 days have dropped from 97,650 outstanding in September, 2005, to 2,479 in March, 2009. Over the same time period, total monthly trade volume has increased from 130,004 to 408,472.And did the CDS market freeze up in the aftermath of Lehman's failure? No. In fact, according to Fitch's CDS Market Liquidity Index, September 19th—the Friday of Lehman Week—was the most liquid day in the CDS market since the index started in March 2006.