Credit default swap of the day: Glitnir

Final Price: Snr 3%, Sub 0,125%. Fellow Icelandic bank Kaupthing’s credit event auction is to be held tomorrow.

Credit Default Swaps: size of the market

From DTCC web site:

Reported estimates of the size of the credit default swap market have so far been based on surveys. These surveys tend to overstate the size of the market due to each party to a trade separately reporting its own side. Thus, when two parties to a single $10 million dollar trade each report their “side” of the trade, the amount reported is $20 million, which overstates the actual size by a factor of two since both reports relate to a single $10 million contract. When examining the outstanding amount of actual contracts registered in the Warehouse (not separately reported “sides”) as of October 9, 2008, credit default swap contracts registered in the Warehouse totaled approximately $34.8 trillion (in US Dollar equivalents). This is down significantly from the approximately $44 trillion that were registered in the Warehouse at the end of April this year.

Interesting is the size of the market Related to Mortgages:

Less than 1% of credit default swap contracts currently registered in the Warehouse relate to particular residential mortgage-backed securities. Mortgage-related index products also have some components relating to residential mortgages and, as a whole, also constitute a relatively small fraction of total credit default swaps registered in the Warehouse.

The Mythology Of Credit Default Swaps

Here we have another interesting reading from Charles Davì:

Pundits from all corners have been chiming in on the debate over derivatives. And much like the discourse that has dominated the rest of human history, reason, temperance, and facts play no role in the debate. Rather, the spectacular, outrage, and irrational blame have been the big winners lately. As a consequence, credit default swaps have been singled out as particularly dangerous to the financial system. Why credit default swaps have been targeted as opposed to other derivatives is not entirely clear to me, although I do have some theories. In this article I debunk many of the common myths about credit default swaps that are circulating in the popular press.

Charles continues the article outlining some features he calls “myths”:

  • The CDS Market Is Not The Largest Thing Known To Humanity
  • Credit Default Swaps Do Not Facilitate “Gambling”
  • The Credit Default Swap Market Is Not An Insurance Market
  • Continue reading the article of Charles here, it really worth your time.

    Asta del giorno: Landsbanki

    È iniziata male ed è finita peggio: Final Price per il settlement dei CDS 1.25% per carta senior, 0.125% per carta subordinata LT2. Peggio di così non credo si sia mai visto.

    Credit default swap del giorno: Landsbanki

    Initial Landsbanki Senior DEbt Recovery Rate Set at 3.375

    … persino peggio, ma molto peggio, del fixing su Lehman.

    Equity Market Manipulation in Five Easy Steps

    How Could the CDS Market Affect Equity Markets?

    If you only consider the movement of capital into the CDS market, then the two have no relationship. That is, a spike in the demand for protection on company ABC’s bonds should not, in and of itself, have any effect on the price of ABC’s stock. However, a spike in the demand for protection on ABC’s bonds will lead to a spike in the price for such protection. Equity traders could view this spike in the price of protection as an indication of deterioration in ABC’s credit condition. This is the critical link. If equity traders ignore the spike as an aberration, they will not take action based on the spike.

    In times of panic, particularly one rooted in a shortage of credit, it is rational for equity traders to view a spike in the price of protection of an entity’s debt as cause for concern. Therefore it would be rational to hedge or liquidate equity positions in that company. Thus, given an increase in the price of protection for ABC’s bonds in the context of today’s markets, we should expect ABC’s equity price to drop.

    Read the full story here, … very intriguing.

    Links: In difesa dei Credit Default Swaps

    Diciamo le cose come stanno…

    The press loves a spectacle. There’s a good reason for this: panic increases paranoia, which increases the desire for information, which increases their advertising revenues. Thus, the press has an incentive to exaggerate the importance of the events they report. As such, we shouldn’t be surprised to find the press amping up fears about the next threat to the “real economy.”

  • Systemic Counterparty Confusion: Credit Default Swaps Demystified
  • In Defense of Credit Default Swaps