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Capital Markets

Credit Default Swaps: More paper and dealers for preferred CDS

But standard documentation and eight dealers’ involvement might not be sufficient to spark investor interest.

One year after Lehman Brothers developed a credit default swap that referenced preferred securities, eight dealers have come up with a standard form of documentation for this product, which was launched in mid-March. But it might take more than having a lot of dealers involved and standard documentation to work up worthwhile interest in the product.

Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan and Merrill Lynch collaborated with Lehman Brothers to develop the new terms. “Investors were telling us they wanted more than two dealers and market standard documentation, so in the last couple of months we’ve got together to determine what that standard documentation should look like,” says Thomas Corcoran, head of hybrid capital trading at Lehman Brothers in New York.

Lehman says it traded $6 billion of these new preferred credit default swaps last year and Corcoran is hopeful that with more dealers involved the figure will quadruple this year. This is based on the fact that the volume of hybrids issued in the primary market has taken off since last December; investors, Corcoran believes, will therefore be looking for ways to hedge this exposure.

Corcoran says: “It’s not dissimilar to how the traditional credit default swaps market developed.

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