06 Jan 2009, Donna Haws , Risk magazine
Tribune was a popular CDS reference entity and a component of many of the CDX indexes of North American CDSs. On December 8, the Chicago-based publishing company opted to restructure its debt obligations under the protection of Chapter 11 bankruptcy, triggering a credit event.
As the use of the auction procedure is not embedded in standard CDS contracts, protocols are required to cash settle CDS and LCDS trades. This was the first credit event auction held to settle both CDS and LCDS contracts in connection with a single reference entity default.
Auctions - which are administered by London-based data vendor Markit and New York-headquartered brokerage Creditex - involve dealers submitting tradable two-way prices to determine recovery rates for underlying debt.
Protection buyers that opt for cash settlement of credit derivatives trades receive the contract's par value, less the recovery rate.