The International Swaps and Derivatives Association (Isda) has launched its settlement protocol for credit default swaps (CDSs) based on the US government-backed mortgage institutions Fannie Mae and Freddie Mac.
As reported on Risk News on September 12, the protocol will be open until October 2, to be followed by an auction on October 6 which will determine the final settlement prices. Market data provider Markit and Creditex, a credit derivatives execution specialist, will run the auction. Estimates of the total volume of outstanding CDS run between $250 billion and $500 billion. The deadline for cash settlement is October 15. Thanks to the US government guarantee, recovery rates are expected to be extremely high - in the mid-nineties - meaning that CDS protection sellers are unlikely to make significant losses.
Isda is also planning to open its Lehman Brothers protocol on October 6, to run to October 8 with an auction on October 10. The protocol for the failed mortgage lender Washington Mutual is tentatively planned for October 14-17 with an auction on October 23, Isda said today.
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