CDS: Central Counterparty on the Way
The Clearing Corporation, and the Depository Trust & Clearing Corporation have signed an agreement that facilitates central counterparty services for the over-the-counter derivatives marketplace.
At first, the clearing initiative will support CDX North American High Yield and Investment Grade indices. CDS products such as iTraxx indices, index tranches, and single name products are scheduled for subsequent roll outs throughout 2008 and 2009.
The bad news:
It will be difficult to move existing deals to the clearing house due to potentially massive risk repricing if the new entity is able to achieve a better credit rating than the current counterparties. The repricing will be at the expense of protection sellers. CDS values depend on counterparty risk [embedded] and obviously a CDS cleared by a “risk free” counterparty carries a higher spread than a bilateral deal with a dodgy investment bank. The adjustment is worth approximately the OIS-Libor spread currently running a 7 times “normal” levels.
June 2nd, 2008 at 4:50 am
You assume that the Clearing Corp is a better credit than a ‘dodgy’ investment bank. For the most market the CC is owned by the ‘dodgy’ investment banks. The CCorps only recourse is to a guarantee fund by the dodgy investment banks. This whole thing sounds like some kind of BASEL II arbitrage and to for the dealers to get points in the press and from naive regulators.
June 2nd, 2008 at 8:06 am
true, but a mutual system should be better than any of the individual component, and if it is not then what’s the point of central clearing ?
June 2nd, 2008 at 8:33 am
call me a cynic, but this sounds like something to get favorable treatment under Basel II and to tell the regulators look we are clearing CDS so leave us kids alone.
June 2nd, 2008 at 10:03 am
you have a point, clearing CDS, the ones that are most liquid and with the lowest risk [and the lowest margins btw] is a cheap way to get the mighty regulators of your back.
June 2nd, 2008 at 10:42 am
[...] A central counter-party is on the way for CDS trades. (Alea) [...]
June 3rd, 2008 at 12:24 am
Hold on, the DTCC can barely clear and settle equities trades… how much of the total volume is FTD these days?
June 4th, 2008 at 3:52 pm
jck,
What is the current OIS-Libor spread?
June 5th, 2008 at 6:47 am
around 45 for 1 month and 68 for 3