Capital relief accounts for 70% of some CDS spreads, quants say

Sliced cake on stand

Up to 70% of the price of a credit default swap (CDS) reflects its value in reducing regulatory capital, rather than its worth as a hedge of default risk, according to new research from two quants at Lloyds Banking Group. The article is the first attempt to capture a much-discussed effect of the Basel 2.5 and Basel III capital rules – both regimes grant capital relief for CDS hedges, and traders claim this extra source of demand is now being reflected in their spreads.

"Markets have been pricing

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