The constant maturity credit-default swaps market, which failed to take off as players predicted last year, may get a boost now that the International Swaps and Derivatives Association plans to create a CMCDS confirmation template. Spokeswoman Louise Marshall said the first draft will be circulated in the next couple of weeks.
Constant maturity CDS first came to market early last year and they were expected to attract protection sellers who had backed away from the tight-spread market because they feared being burned by a widening (DW, 1/19/04). Michiko Whetten, a quantitative analyst with Nomura Securities in New York, said these swaps failed for multiple reasons including lack of liquidity, relatively wide bid/offer spreads, and consequent reliance on dealer calculations for pricing. Furthermore, the spread curve may not be well defined because liquidity in tenors other than five-year have been improving only recently, she said.
Marshall declined to speculate on why the market for CMCDS has lagged but said, "It has definitely been suggested that a standard form document would help, and I think it's fair to say that a standard document is often a helpful component of liquidity."
Also, structured deals referencing constant maturity credit-default swaps are getting more attention from investors now that spread widening appears to be a legitimate threat. "Floating-spread CDOs may be popular as people focus on the benefit of protection against spread widening," Whetten said. Ian Clague, a managing director for North America with GFI in New York, added firms can get more comfortable with CMCDOs now that the first deals have been done (DW, 5/30).
