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« Sector Update and A Personal Note | Main | Doug Kass on Housing Predictions: An Update »

April 15, 2008



I must appreciate the way you have analyzed the situation. Great work done.



Found this blog on Real Clear Markets this morning. Excellent.


Found this blog on this AM. I think it's great.


Banks' new tool to deal with counterparty ris

Rudimentary and idiosyncratic versions of these so-called contingent credit default swaps (CCDS) have existed for five years, but they have been rarely traded due to high costs, low liquidity and limited scope.

But now there are high hopes that a revamped version of CCDS, which will bear the formal blessing of the International Swaps and Derivatives Association, will be more successful when it is released in two to three months' time.

Counterparty risk has become a particular concern in the markets for interest rate, currency, and commodity swaps – because these trades are not always backed by collateral, leaving banks vulnerable to sudden losses if counterparties collapse.

he new CCDS was developed to target these institutions. Some banks have already started doing deals using a rough and ready version of the forthcoming standardised documentation.

Trading volumes are thought to remain relatively small but, according to Bill Mertens, head of CCDS at Icap, the interdealer broker, demand has started to grow.

"We're constantly looking for the [point where growth] explodes. That may happen shortly," he says.

Unlike in a normal credit default swap, where the notional risk that is hedged is defined at the outset of the contract, each CCDS is linked to a second derivative, so the risk being hedged varies over time according to market movements in the underlying transaction. That means these contracts can be used to protect or lock in mark-to-market gains on the values of derivative contracts, as well as to protect dealers against counterparty risk.

But dealers are sceptical that the instrument will take off, particularly where more liquid, if imperfect hedges are available, for example through more traditional CDS. GFI, a rival interdealer broker to Icap, abandoned CCDS last year because of a lack of interest, though it said it would re-enter the market if demand picked up.

One counterparty risk officer at a leading European bank called CCDS "a product with nowhere to go".


Great analysis! This is like a commodity future market with no underline cash market. So it becomes a pure gamble where greed/fear could push prices to total absurdity.

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