Icelandic banks in default

An Isda spokesperson told Risk a date for cash settlement auctions for credit default swaps linked to the two banks has not been set. But the move was inevitable once the Icelandic central bank intervened to shore up the country’s financial system by taking control in Glitnir and Landsbanki.

The banks become the first European firms in default since the credit crisis began, and the first credit event in the region since Italian dairy company Parmalat defaulted in 2003.

It follows on from other high profile credit events to have taken place in the past month: notably at Fannie Mae and Freddie Mac, Lehman Brothers and Washington Mutual.

A settlement auction for CDS tied to Fannie Mae and Freddie Mac took place on October 6, with auctions on Lehman and Washington Mutual scheduled for October 10 and October 14.

At the October 6 auctions, the final price for Fannie Mae’s senior and subordinated obligations were set at 91.51% and 99.9% respectively, while prices for the equivalent obligations for Freddie Mac were set at 94% and 98%.

In cash settled CDS transactions, protection sellers are required to pay the par value of defaulted bonds to protection buyers, minus the recovery rate.

Fannie and Freddie auctions raise questions about CDSs

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