Recovery swaps hit Europe

New Angles

European banks have begun to make a market in recovery risk. Investors can now hedge recovery risk on a credit using recovery swaps, instead of simply buying default protection with credit default swaps.

These instruments, piloted by BNP Paribas, provide banks with a way of selling recovery risk into the market and offsetting risk they have accumulated on their books from setting recovery rates on deals sold to investors.

In February, BNP Paribas launched a new feature in its Thunderbird III