Thirty-two issuers defaulted globally in 2005, having an impact on bonds worth a total of $29 billion. With huge volumes of credit default swaps now written against these bonds, how and when recovery rates are determined is crucial. There is an urgent need for the market to establish a settlement standard that can minimize any price and recovery rate manipulation in the most efficient manner. The Isda protocol in May amended existing index-related contracts from physical to cash settlement but most single-name CDS are still settled physically and the difference between the two processes creates recovery basis risk.
