Market To Hash Out Plan To Cash Settle Single-Name CDS

Market participants are laying the groundwork for a solution to the cash settlement of single-name credit default swaps.

  • 20 Jan 2006
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Market participants are laying the groundwork for a solution to the cash settlement of single-name credit default swaps. The International Swaps and Derivatives Association has scheduled a conference call with providers of market indices and interested parties for next Monday at 9 a.m. to discuss a cash settlement approach to both index and single-name CDS. The CDS protocols developed by ISDA to cash settle index CDS trades have so far excluded single-name CDS. But the success of these protocols has focused attention on how to develop documentation that would include the cash settlement of single-names CDS, according to market observers.

A spokeswoman for ISDA said the discussion next week will center on how to come up with a long-term solution, adding that ISDA's role in an agreement is not definite. "The call is to discuss the idea [of a cash settlement]. It is not a foregone conclusion that we will be involved in it," she said.

According to one source familiar with the ISDA protocols, there is strong market interest in finding a solution because of the volatility in the trading of bonds protected by single-name CDS. As illustrated in the Delphi Corp. bankruptcy, the non-inclusion of single-name CDS in the auto supplier's cash settlement protocol caused a short squeeze as investors scrambled to collect bonds to physically deliver for CDS contracts. The source said that a short squeeze that might happen after large credit events, such as a bankruptcy of General Motors, could push the price of bonds to par, making CDS protection on these securities worthless.

He added that there needs to be a uniform approach to cash settlement. "If you don't include single-name trades [in cash settlement] you will have a whole part of the market settling one way and a whole part of the market settling another way. People will be less willing to use CDS," he concluded.

So far, ISDA has not included single-name CDS in cash settlement protocols partly because of time constraints. In the case of Calpine Corp., for example, there were discussions about including single-name trades in the protocol, but the association decided against it because there was not enough time to include them in an agreement (CIN, 1/9). Buyers of CDS protection have only 30 business days to settle a trade after a credit event.

Nevertheless, observers believe that a solution to the cash settlement of single-name trades will be coming soon. One analyst at a bank covering the product said this will be the next biggest change in the CDS market. "Something will happen in single-name CDS contracts whereby an auction to cash settle single-name trades will be written into single-name contracts," he said.

  • 20 Jan 2006

All International Bonds

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4 Barclays 75,288.19 241 6.66%
5 Goldman Sachs 68,504.71 208 6.06%

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1 Bank of America Merrill Lynch 10,650.87 23 11.13%
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3 HSBC 6,243.46 23 6.52%
4 Citi 4,355.35 13 4.55%
5 SG Corporate & Investment Banking 4,273.37 17 4.46%

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1 JPMorgan 6,305.34 22 10.84%
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3 UBS 4,270.64 20 7.34%
4 Citi 3,833.33 28 6.59%
5 Goldman Sachs 3,788.75 20 6.51%