A new template for trading recovery locks is paving the way for the instruments to be the next development in credit-default swaps. Recovery locks allow investors to take a view on the post-default level of recovery, while locking in value and cutting credit volatility. Mark Davies, senior managing director and global head of credit trading at Bear Stearns, said structuring desks with big positions in fixed recovery are driving trading, but many market participants are not actively trading.
"Recovery market CDS is still very early, but it's interesting because it's one of the last risks to be disaggregated," said David Carlson, senior managing director and global head of credit derivatives structuring and marketing at Bear. "Recovery rate swaps are the final decomposition of credit. They are a powerful thing that will fundamentally change the distressed market when it gets up and running."
