Lehman Brothers believes it has developed a new tool for hedge funds. In February the US investment bank launched a product called preferred credit default swaps, and in August was planning to extend the product by launching a PCDS index.
As the name implies, PCDS are just like regular credit default swaps, but with preferred and trust preferred securities serving as the underlying. The regular Isda documentation for CDS suffices, with just a couple of tweaks: first, in the event of a default on preferred CDS, the buyer of protection can deliver a preferred or trust preferred security in addition to any more senior obligation.
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