Equity-default swaps will struggle to take off because they lack practical use and are more of a novelty, Richard Martin, head of quantitative credit strategy with Credit Suisse First Boston in London, told the seminar. He described EDS as a "tiny market" and estimated it was about one-tenth the size of the CDS space.
Credit-default swaps were created for a specific financial reason, namely, to offset bonds, Martin said. EDS, on the other hand, are geared toward sophisticated players looking to diversify their portfolios, express views on market directionality and want additional ways to pick up yield.
Martin noted CSFB structured a novel EDS CDO called CEDO I earlier this year (DW, 5/6). CEDO I is unique because it consists of pure EDS but has a AAA rating, he said, adding the structure was created to provide a source of yield in a tight interest rate and tight credit spread environment.
