Market questions Isda’s work on CDSs on ABS

New Angles

The International Swaps & Derivatives Association is sketching out standardised definitions for credit events for credit default swaps (CDSs) on asset-backed securities (ABSs). But ABS market participants are sceptical about whether this portion of the market will develop at all.

Currently, only a very slight volume in CDSs on ABSs exists. Some market participants argue that the lack of standardised documentation and definitions is holding the market back. But others say there is no need to hedge most ABS deals, because they are generally quite stable.

“The CDS market is very large and liquid. But with ABS, you don’t have the breadth of investors. Who would be the buyers [of CDSs on ABSs]? Who would want to hedge an asset class that is already quite stable?” asked Adam Clayton, managing director in Merrill Lynch’s London-based securitisation team, during the June ‘Global ABS’ conference in Barcelona, Spain.

“I’ve seen a lot of deals where investors do not intend to hedge,” added Ian Sideris, London-based partner at international law firm Simmons & Simmons. Only a few investors at the conference said they would use CDSs on ABSs. One said he might use them to short the market, but that it would not be a standard strategy as there is not enough volatility in ABS spreads. One more optimistic credit structurer said it is always positive to take a risk and make it tradable.

Cynthia Parker, a UK-based managing director at US monoline insurer Ambac, said she thought Isda’s initiative was an attempt to promote the active trading of such products. But she adds that the wide variety of asset-backed deals and their underlying collateral would make it difficult to create a single document.

This was refuted by Kimberly Summe, general counsel at Isda in New York, who said Isda would create just a single template by October. “CDS referencing ABS is a small and growing area that needs standardised definitions to encourage liquidity,” Summe says. Work on the definitions began in April.