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Isda prepares to settle CDSs on failed banks

The International Swaps and Derivatives Association (Isda) has launched its settlement protocol for credit default swaps (CDSs) based on the US government-backed mortgage institutions Fannie Mae and Freddie Mac.

    • Alexander Campbell
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As reported on Risk News on September 12, the protocol will be open until October 2, to be followed by an auction on October 6 which will determine the final settlement prices. Market data provider Markit and Creditex, a credit derivatives execution specialist, will run the auction. Estimates of the total volume of outstanding CDS run between $250 billion and $500 billion. The deadline for cash settlement is October 15. Thanks to the US government guarantee, recovery rates are expected to be extremely high - in the mid-nineties - meaning that CDS protection sellers are unlikely to make significant losses.

Isda is also planning to open its Lehman Brothers protocol on October 6, to run to October 8 with an auction on October 10. The protocol for the failed mortgage lender Washington Mutual is tentatively planned for October 14-17 with an auction on October 23, Isda said today.

See also: Fannie and Freddie CDS to settle at October auction

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