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
Email a colleague
Request a PDF

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

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 20,521.83 80 6.93%
2 Barclays 20,382.90 37 6.89%
3 JPMorgan 18,760.94 72 6.34%
4 Goldman Sachs 17,444.96 41 5.89%
5 BNP Paribas 16,525.22 36 5.58%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 48,528.41 214 6.32%
2 Deutsche Bank 44,075.51 161 5.74%
3 BNP Paribas 41,452.79 240 5.40%
4 JPMorgan 37,278.65 134 4.85%
5 SG Corporate & Investment Banking 36,258.27 187 4.72%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 1,607.28 5 28.64%
2 Credit Suisse 1,301.65 4 23.20%
3 BNP Paribas 522.35 4 9.31%
4 SG Corporate & Investment Banking 444.17 3 7.92%
5 Morgan Stanley 331.78 2 5.91%