Yesterday, October 5th 2021, saw what appears to be the most significant day of catastrophe bond names “trading” and being registered on the FINRA Trade Reporting and Compliance Engine (TRACE) ever, with somewhere around 114 individual names, or tranches, of cat bond notes recorded as seeing activity.
The U.S. Financial Industry Regulatory Authority, Inc’s (FINRA) Trade Reporting and Compliance Engine (TRACE) is a system designed to aggregate and make transparent data on over-the-counter (OTC) private transactions in securities between counterparties.
The secondary market for catastrophe bonds, where notes change hands between investors or investment funds, can be relatively liquid at times and liquidity has been rising alongside issuance over the last few years.
But cat bond trading volumes are often not that high, especially at a time of year when primary cat bond issuance is slower, such as during peak hurricane season, meaning the number of trades recorded in the TRACE system can often just be single figures of names per day, while some days see no secondary cat bond trading action registered in TRACE at all.
It’s important to note that not every cat bond trade makes it into TRACE, as some broking desks don’t need to report every trade, being outside the United States.
But yesterday, October 5th, saw an enormous number of names, or tranches of outstanding cat bonds, reported as “traded” by TRACE.
We put “trade” in quotes as it seems likely, and our sources agree, that this was not natural trading between counterparties. Rather it seems more likely to be between entities of a single counterparty, or an arranged transfer of a cat bond portfolio.
On Tuesday October 5th TRACE shows 114 individual cat bond names (tranches) as having been “traded”, with a broker dealer involved in each of these.
In terms of actual “trades”, as some names changed hands more than once, it appears to have been somewhere around the 120 mark.
Sources tell us that, in terms of number of names moving between parties, this is likely the biggest day for the secondary cat bond market in history.
However, our sources also suggest that yesterday’s activity is most likely what would be considered cross trading, so trading between entities owned by a single party, or an arranged transfer between two parties, where a broker dealer was required to sit in the middle and so the trades ended up recorded on TRACE.
This could represent trading between entities or funds of a single investment party, perhaps, an existing cat bond fund manager moving a portfolio from a private fund into a UCITS or mutual strategy, or a pre-arranged bulk trade or transfer between two different parties.
So, while the cat bonds may have “traded” hands, or at least legal owners, they haven’t been traded in the truer sense of the activity.
In terms of the dollar amount of catastrophe bonds that moved hands, or fund structure, yesterday, that is more difficult to say, as TRACE records show numerous trades as $1m+, so they could be much larger.
It’s unlikely to be the biggest day in terms of dollar value though, as so many of yesterday’s cat bond “trades” recorded in TRACE were in smaller chunks than $1 million.
Yesterday’s activity has certainly got the insurance-linked securities (ILS) investment community intrigued though, with a number of participants reaching out and discussing this unusual TRACE cat bond activity with us through today.
There is a small chance the trading could have been an investor liquidating a cat bond portfolio, of course. But it seems unlikely given the volume changing owners (or entities) in a single day, so cross trading seems a more reasonable explanation.
Should we learn any different we will let you know.