CDS 'big bang' could see 18% increase in tear-ups, Markit says
Changes to credit default swap (CDS) contracts due to come into force on April 7 could result in an upturn in trade-compression activity, according to market information provider Markit.
Markit's London-based director of credit products, David Austin, said the changes would "simplify the process of trading".
From tomorrow, the auction settlement process for CDSs worldwide will be hardwired into the contract; the determinations committees set up by the International Swaps and Derivatives Association (Isda) will have the final say on whether or not a credit event has occurred; and the protection granted by a CDS will start 60 days before the current day for a credit event, and 90 days before a succession event, rather than starting the day after the CDS trade is completed.
The latter change is intended to allow offsetting trades to provide perfect hedges. For example, picture a CDS dealer who sold protection on an underlying on January 5 and bought protection on the same underlying a week later, on January 12. Credit events are not always immediately obvious, and if, later on - say February 10 - it was discovered that a credit event had occurred on January 10, the dealer would not have been hedged. Under the new rules, the dealer would be hedged because the contract provides protection for the 60 days before the credit event took place.
In North America, the 'big bang' will also see single-name CDS trades with a fixed coupon of either 100 basis points or 500bp, together with an upfront payment to cover the difference between the fixed coupon and the current price. Austin expects investors in high-yield and distressed names to gravitate towards the 500bp CDS.
The measures are broadly aimed at improving standardisation - as well as simplifying the trading process and reducing the risk of trade breaks. Austin said they will also allow for more trade compression, in which offsetting trades are cancelled out and torn up. Markit estimates the reforms will allow 18% more trades to be compressed, reducing the notional outstanding in the credit derivatives market.
Markit, with the US trading platform Creditex, managed to tear up $1.35 trillion in trades last year in this way -standardised index trades were easier to handle than single name CDSs, the companies said. The total notional outstanding of the credit derivatives market was $54.6 trillion in June 2008, the most recent date for which figures are available, according to Isda.
See also: Isda launches hardwiring supplement for CDS settlement auctions
Industry Platform of the Year - Markit/Creditex Portfolio Compression Platform
Isda documentation to cover CDS settlement auctions
Isda to publish auction settlement supplement, launches close-out protocol
Standard US CDS contract sparks hedging worries
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Printing this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. Copying this content is for the sole use of the Authorised User (named subscriber), as outlined in our terms and conditions - https://www.infopro-insight.com/terms-conditions/insight-subscriptions/
If you would like to purchase additional rights please email info@risk.net
More on Regulation
FRTB start dates must align globally, says European Commission
Lawmaker could trigger delay to market risk rules in Europe if US implementation drags on
Fed green lights more capital relief trades
Five US banks authorised to issue repeat credit-linked notes backed by financial guarantees
Basel III endgame: why moving fast might prove better for banks
Republicans are pushing for reproposal, but a rapid finalisation may prove less far-reaching
Isda pushes to ‘decouple’ Simm calibration from model changes
Emir 3.0 prompts effort to separate risk-weight revisions from methodology updates
Basel war on window-dressing may smooth liquidity, at a price
Changes to G-Sib charge could curb year-end repo volatility, but also cut balance sheet capacity
One year on, regulators still want a cure for bank runs
Broad support for higher outflow assumptions on uninsured deposits, but that won’t save insolvent banks
Watchlist and adverse media monitoring solutions 2024: market update and vendor landscape
This Chartis report updates Watchlist monitoring solutions 2022 and focuses on solutions for sanctions (name and transaction) screening and monitoring adverse media and its related elements
Basel Committee reviewing design of liquidity ratios
Focus on LCR and NSFR after Silicon Valley Bank and Credit Suisse, but assumptions may not change
Most read
- Breaking out of the cells: banks’ long goodbye to spreadsheets
- Too soon to say good riddance to banks’ public enemy number one
- Industry calls for major rethink of Basel III rules