Credit default swaps have been in the news quite a bit lately, so I’m posting some links to articles:
Credit Default Swap (CDS) Primer, Nomura, May 2004
The CDS Market: A Primer, Deutsche Bank, 2004
Bloomberg article on Insider Trading (hat tip Bill Cara) Note: it’s not clear to me why these changes in the CDS levels did not leak into the bond market via arbitrage of the basis.
Update, 2007-7-29: There’s a good introduction at the Accrued Interest blog.
Update, 2007-9-13: There are some good downloadable papers at John Hull’s website. Hull & White, 2000 is the basis for the Bloomberg CDSW screen.
Update, 2008-01-28: Hu & Black discuss the problems inherent in “debt decoupling” – if the owner of a bond is fully, or even more than fully, hedged via CDSs, this block of bonds might be voted in a manner that is predjudicial to the economic interest of that class of creditors.
There are also several sources of qualitative evidence. One is the recent tendency for credit default swap contracts to require the protection buyer, if it is also a creditor, to act in the interests of other creditors. This suggests concern that the protection buyer might not otherwise do so. How this obligation can be enforced, however, without disclosure of either votes or hedges, is anyone’s guess. We have also heard from bankruptcy judges that they sometimes see odd behavior in their courtrooms, which empty crediting might explain. For example, one judge described a case in which a junior creditor complained that the firm’s value was too high, even though a lower value would hurt the class of debt the creditor ostensibly held.
There is some commentary at Naked Capitalism.
Update, 2008-2-6: More warnings via Naked Capitalism: CDSs may not work as advertised due to operational issues, the ascendency of Sales over Risk Management, and the relative amounts of notional vs. deliverable bonds.
Update, 2008-3-30: Another risk with CDSs is a potential disparity between the cash-settlement price and the ultimate recovery price, as has happened with Delphi. See AleaBlog and Felix Salmon.
Update, 2008-4-3: It’s linked in the comments, but I should highlight the February 21 review of some BoC Research into CDS Pricing.
Update, 2008-9-4: See also CDS Recovery Locks.
Update, 2009-3-12: Risk Weight of Credit Default Swaps.