{"id":5275,"date":"2009-01-30T15:14:27","date_gmt":"2009-01-30T19:14:27","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=5275"},"modified":"2009-01-30T15:14:27","modified_gmt":"2009-01-30T19:14:27","slug":"cds-reform-proposals-i-dont-get-it","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=5275","title":{"rendered":"CDS Reform Proposals: I Don't Get It"},"content":{"rendered":"

Bloomberg has reported<\/a>:<\/p>\n

For the first time, the market will have a committee of banks and investors making binding decisions that determine when buyers of the insurance-like derivatives can demand payment and could influence how much they get, industry leaders said yesterday at a conference in New York. Traders also will revamp the way the contracts are traded, including requiring upfront payments to make them more like the bonds they\u2019re linked to.
…<\/b>
The plan doesn\u2019t change contracts traded in Europe.
…<\/b>
In one of the most noticeable changes for traders, those who buy protection will pay an upfront fee depending on current market prices, and then a fixed $100,000 or $500,000 annual payment for every $10 million of protection purchased. Now, upfront payments are only required for riskier companies, and the annual payment, or coupon, on most contracts is determined by the daily market level.<\/p><\/blockquote>\n

Dealbreaker<\/i>, bless its heart, is contemptuous<\/a>:<\/p>\n

We are looking forward to the world where the only finance products permitted go up forever, and where everyone makes above average returns.<\/p><\/blockquote>\n

I’m mainly confused, and hoping that the Bloomberg reporters simply got it wrong. A standard up-front fee for the buyers<\/i> of protection? It makes no sense. The buyer’s risk is limited to the sum of the present value of the payments required. A five year contract with a 5% premium limits the buyer’s potential loss to 25% of the notional value. The tail risk of the contract is owned by the seller of the protection, who can lose 100% of notional on the very first day the contract is in existence.<\/p>\n

Selling protection has capital implications roughly equivalent to owning the bond. I have no problem with the idea that CDS sellers post margin equivalent to what they would have to were the position an actual bond – but most of them do already. The trouble started when the AIGs and MBIAs of this world sold protection without posting collateral or taking a high enough capital charge for regulatory purposes.<\/p>\n

And what’s this with a fixed standard rate of $100,000 or $500,000 per year for the premium (paid by the buyer to the seller) on $10-million notional? That’s 1% and 5%, respectively. I can see that it might be very useful to standardize tick sizes, so that all contracts will trade with, say 10bp ticks … but those premia don’t make any sense.<\/p>\n

Note that with 10bp ticks (any size ticks, actually), virtually every contract would have a value at the opening, which would be settled by cash payment between buyer and seller at the time the contract is written. I don’t have any problems with that idea – it would make contracts more fungible, particularly if settled by a clearinghouse.<\/p>\n

But we are in the hysteria phase of CDS demonization and the politicians need a pulpit<\/a>. ISDA has released a mild demur<\/a> – I can only hope they’re more vociferous behind closed doors.<\/p>\n

It was announced yesterday<\/a> that JPMorgan’s analytics will go open-source; but no details of licensing have yet been released.<\/p>\n","protected":false},"excerpt":{"rendered":"

Bloomberg has reported: For the first time, the market will have a committee of banks and investors making binding decisions that determine when buyers of the insurance-like derivatives can demand payment and could influence how …<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-5275","post","type-post","status-publish","format-standard","hentry","category-miscellaneous-news"],"_links":{"self":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/5275","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=5275"}],"version-history":[{"count":0,"href":"https:\/\/prefblog.com\/index.php?rest_route=\/wp\/v2\/posts\/5275\/revisions"}],"wp:attachment":[{"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=5275"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=5275"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/prefblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=5275"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}