Investors in credit default swaps (CDS) could find their holdings unexpectedly affected by corporate spin-offs and de-mergers, rating agency Fitch has warned.In a report published this week, Fitch analysts Roger Merritt, James Batterman and Tim Greening warn that the CDS market is not a perfect substitute for the loan and bond markets.In particular, in the event of a spin-off, loan and bondholders could find themselves benefiting from early retirement or protection agreements. CDSs, however, would not be retired early, even if the relevant obligations have been retired. It is not altogether clear what would happen in such a case, the report says, suggesting that the CDS holder could end up with a significant mark-to-market loss."The protection buyer could end up owning a short position with a shell company holding little or no debt and/or assets, whereas any actual hedged debt obligation no longer exists," the analysts wrote.They add that credit derivatives traders are now considering changing the standardised International Swaps and Derivatives Association documentation in order to protect CDS investors from the effects of a de-merger.
More on Structured Products
Regulatory panel suggests backtesting internally is best practice
Growing appetite for ETFs buoys market confidence
The region's exchange-traded funds take in $56.2bn by end of October
US SEC exempts exchange-traded managed funds from disclosure protocols
Sign up for Risk.net email alerts
Sponsored webinar: IBM Risk Analytics
Nominated for two technology awards
Nominated for post trade technology award
Sponsored webinar: Collateral and counterparty tracking
There are no comments submitted yet. Do you have an interesting opinion? Then be the first to post a comment.