An auction to determine settlement prices on credit derivatives referencing Fannie Mae and Freddie Mac took place yesterday, making it by far the largest credit event fixing to have taken place since the process was first introduced in 2005.The auction set the final price for Fannie Mae senior obligations at 91.51%, while subordinated obligations were fixed at 99.9%. Senior obligations of Freddie Mac were fixed at 94%, while subordinated obligations were set at 98%. Thirteen dealers participated in the auction, which was administered by London-based data provider Markit and New York electronic trading platform Creditex. A record 651 organisations adhered to the protocol, developed by the International Swaps and Derivatives Association. “The very high participation rate in this protocol and its success in settling a significant number of credit derivatives trades on the two government-sponsored entities (GSEs) constitute a major achievement for Isda and the industry,” commented Bob Pickel, executive director and chief executive at Isda in New York. On September 7, the US Treasury and the Federal Housing Finance Agency announced they would take Fannie Mae and Freddie Mac into conservatorship – triggering a credit event on credit derivatives involving the two entities. Isda announced the launch of its Fannie Mae and Freddie Mac credit default swap (CDS) protocol on September 30 – a process designed to enable institutions to amend their CDS documentation to allow settlement at a single final price, to be determined at the auction. The fixing is also meant to prevent price and settlement distortions that could occur when CDS exposure is far greater than the number of outstanding bonds. However, the process did not run completely smoothly, with initial disagreement among market participants over whether the principal-only component of debt securities issued by the two GSEs would qualify as deliverable obligations. On September 16, law firm Allen & Overy determined that a principal-only component should not be included in the list of deliverable obligations for the purposes of the settlement auctions. A final list of deliverable obligations was published at the end of last month. Credit event auctions were first introduced in June 2005 following the collapse of Michigan auto parts manufacturer Collins & Aikman. There have been several occasions for the industry to perfect the technique since, following defaults at US airlines Delta and Northwest, Michigan auto parts manufacturer Delphi, and, more recently, Canadian printing company Quebecor World, among others.
Having navigated the largest credit event fixing to date yesterday, the industry is gearing up for an auction on October 10, this time to determine the settlement price on CDS contracts referencing Lehman Brothers.
More on Structured Products
UBS bolsters New York equities desk, among other moves in June
Product will pay 5.95% annually if FTSE 100 or Euro Stoxx 50 are above 65% barrier on coupon date
Lack of liquid options on European mid-cap benchmarks leaves investors stuck with the blue chips
New product issuance in Europe could dry up as result of overbearing new rules, says Graf
Sign up for Risk.net email alerts
Sponsored video: MarketAxess
Sponsored video: Tradeweb
Multifonds talks to Custody Risk on being nominated for the Post-Trade Technology Vendor of the Year at the Custody Risk Awards 2014
Sponsored webinar: IBM Risk Analytics
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.