Recovery swaps trading on the rise

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Delphi's Chapter 11 filing for bankruptcy protection on October 8 has sparked increased trading activity in recovery swaps, say dealers.

Recovery swaps allow market participants to take a view on the recovery rate on credit default swap (CDS) contracts in the case of default. For instance, two counterparties might agree to exchange a fixed recovery rate of 40% versus the realised recovery rate.

Dealers originally attempted to get recovery swaps off the ground in early 2004, but the benign credit

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