Friday, January 30, 2009

Upfront CDS: Live in March

"Overhaul" of the CDS market, including upfront CDS (which I discussed at length the other day) and a formal Determinations Committee, to come in March. From Bloomberg:

Dealers plan to overhaul credit- default swaps in March to curb risks in the $28 trillion market, making the derivatives more like bonds and creating a committee that will arbitrate disputes. For the first time, the market will have a committee of dealers and investors making binding decisions that determine when buyers of the insurance-like derivatives can demand payment and could influence how much they get, industry leaders said yesterday at a conference in New York. Traders also will revamp the way the contracts are traded, requiring upfront payments to make them more like the actual bonds they’re linked to.
It looks like I was right about the size of the fixed coupons as well:
In one of the most noticeable changes for traders, those who buy protection will pay an upfront fee depending on current market prices, and then a fixed $100,000 or $500,000 annual payment for every $10 million of protection purchased. Now, upfront payments are only required for riskier companies, and the annual payment, or coupon, on most contracts is determined by the daily market level.
The Bloomberg story also has this to say about the Determinations Committee:
Few details were discussed on how members of the committee will be selected, though it will be balanced between dealers and investors, with members publicly disclosed.
I'll believe it when I see it. From what I understand, the Determinations Committee will be established via a supplement to the 2003 ISDA Credit Derivatives Definitions. As I've noted before, the ISDA is dominated by the major dealers. Having been involved in the ISDA's drafting process before, I can attest to the high quality of the process. But there's no denying that the interests of the dealers predominate. And I'm skeptical that they'll be willing to give up too much of their influence in the CDS market.

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