The Role of Clearinghouses and Central Counterparties (CCP) in CDS Markets – Part 2

In part 2 of our explanation of CDS central counterparties, we highlight issues and concerns regarding a central CCP and touch on the issue of whether central clearinghouses really reduce risk as people expect or might possibly have opposite or unintended effects.

The Role of Clearinghouses and Central Counterparties (CCP) in CDS Markets – Part 1

Central clearinghouses have been frequently proposed as a solution to fix the CDS markets or prevent a future CDS market crisis. But what exactly does a central clearinghouse do, how does it work and will it really help fix or reduce risk in the CDS?

ICE Link speeds up novation process

ICE Link recently announced a new Novation Consent = Confirmation (C=C) initiative which aims to make it easier for credit default swap traders to novate trades.

Sallie Mae keep falling

The CDS that is.

Citigroup, on Friday, officially agreed to sell its student loan business, Student Loan Corp, to Discover Financial Services and SLM Corp (Sallie Mae) as it continues to shed assets strengthen its balance sheet. Meanwhile, SLM credit default swaps have continued a tightening spree that began earlier this month.

Will investors prefer to rent or own Hertz swaps?

Late last week, Hertz Global Holdings, Inc. announced its revised merger/acquisition agreement to buy Dollar Thrifty Automotive Group for $50 per share. The original agreement was made in April at a price of $41 per share (~$1.2 billion) before Avis Budget Group joined the bidding war by making its own increased $1.35 billion cash and stock bid in between.

Collateralizing Credit Default Swaps

As the credit default swap market is an institutional-only market that requires margin-type accounts to take advantage of the benefits of leverage inherent in the contract, a vast majority (measured by number of participants – not necessarily by amount of money) of investors including retail investors and long-only institutional investors are often unable to participate in this market. The solution for these investors to bypass regulations or restrictions and enter the market is often found in what is called a credit-linked note.

Quanto CDS gaining significance in the Greek trade

What is better than buying credit default swaps protecting several million dollars of Euro-denominated Greek sovereign debt?

The role of Counterparty Valuation Adjustments (CVA’s) in rising sovereign CDS levels

A recent report published by the Bank of England (BoE) cites “increased hedging by CVA desks has been an influential factor behind these [rising European sovereign CDS price] moves.”

Potential Glencore and Xstrata merger poses CDS issue for investors

Rumours continue to swirl around the possible tie-up of Swiss commodities trader Glencore International and mining company Xstrata – which it already owns a third of. While a premium on Xstrata stock could be good for shareholders, Glencore CDS investors are wondering how that could impact their company’s use of debt in the future.

Opportunities still exist in negative basis trades

DerivativesWeek reports on recent research from Goldman Sachs credit strategist Alberto Gallo who calculates that the CDS-cash basis is now 0 to -50 basis points in the CDX North American index by asset swap measurements with pockets of CDS-cash basis that offer attractive returns.