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Credit derivatives: Big bang to avert blow-up

Credit default swaps market gets its house in order.

Anyone predicting that 2009 will be a year of big change for the CDS market will hardly have been sticking their neck out, but they should certainly be proved right in March. Although progress towards a central counterparty has been painfully slow, the introduction of the new single-name US CDS contract and Isda’s "big bang" protocol are both imminent. The former has been designed to make these contracts easier to clear, and the latter will incorporate settlement auctions into CDS definitions – the so-called hardwiring of contracts.

"The aim [of the new contract] is to make the much-maligned CDS market simpler and more transparent, bring new liquidity, make trades easily fungible among themselves and generally be a more suitable instrument for central clearing," says Ratul Roy, a credit strategist at Citi. The most notable feature of the new single-name US CDS contract is that restructuring has been removed as a credit event. Many hours have been spent debating the treatment of restructuring in CDS contracts, but the desire for as much uniformity as possible between different trades has settled the issue. "For simplicity’s sake the clause is being removed in order to make credit events clearer to holders," says Brian Yelvington, analyst at CreditSights.

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