Alliance & Leicester, with approximately GBP2 billion (USD2.92 billion) in capital, is considering entering the credit-default swaps market for the first time. An official at the Leicester, U.K.-based mortgage bank said it will use credit-default swaps if it determines there is no significant documentation risk. In addition, the bank would be looking at writing protection for high-grade entities. "It is all about certainty," he said, explaining that the bank would like to see clearer documentation of what defines a default and tightening of the cheapest-to-deliver rules. It is unlikely to enter the market within the next six months, he added.
If the bank decides to go ahead, it would use default swaps to move risk off balance sheet, for example selling credit protection instead of purchasing a bond outright. The official said it is too early to determine the potential size of its book. It has looked at synthetic securitization as a method to remove credit risk from its portfolio, but has not made a decision either way as to whether it would actually go ahead with a CDO.
In terms of choosing a counterparty, the bank would look for a good market price compared to available pricing on bonds. And, the official stressed, standard documentation is extremely important. "We would want to limit the deliverability of the cheapest-to-deliver," he said. "We wouldn't want a 15-year convertible bond for a three-year transaction." Also, the bank would look to incorporate modified restructuring rules in place of the current European standard.