Dura auction breaks new ground

For the first time, the International Swaps and Derivatives Association 2006 Dura Protocol permitted cash settlement of single-name, index, tranches and other credit derivatives transactions. Previous protocols enabled cash settlement only of index trades.

The auction to finalise prices on Stockton, Il-based Dura’s senior and subordinated bonds was held on November 28 and administered by Creditex and Markit. Previous auctions to determine the final price for defaulted bonds consisted of only one bidding period. The Dura auction featured two bidding periods.

The idea behind this changed auction process (which has become known as credit event fixing) was to generate a price based on supply and demand dynamics rather than dealers guessing what the bonds might be worth, explains Mazy Dar, head of electronic platforms at Creditex.

“One of the issues was that previous auctions would give a final price, but if you went to the market you would find people wouldn’t want to trade at that price,” says Dar.

The final price was fixed at 3.5% for subordinated bonds and at 24.125% for senior bonds.