20 Nov 2008, Donna Haws, Risk magazine
The turbulence in global financial markets has caused the technical default of a number of popular CDS reference entities, testing the cash-settlement auction process, which is administered by New York-based brokerages Creditex and Markit. The procedure involves a blind auction in which dealers submit tradable two-way prices for the defaulted underlying bonds. Outliers are stripped from the results, while banks are penalised for overly aggressive pricing.
The auction terms and date will be determined soon by Markit LCDX dealers and published on the International Swaps and Derivatives Association website.
The Masonite auction will be the second credit-event auction to take place under LCDS documentation. The first took place on October 23, when US-based video store Movie Gallery failed to make an interest payment on its first lien loan, triggering a failure-to-pay credit event on contracts referencing the company.