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Credit Default Swaps |
HenryTo
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 Posted: Wed Mar 19, 2008 9:07 am Post subject: Credit Default Swaps |
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"Real Money" investors, such as pension funds and insurance companies, are now selling into the CDS market, given the immensely attractive spreads relative to current default rates:
http://www.ft.com/cms/s/0/6b6ae95e-f52c-11dc-a21b-000077b07658.html
| Quote: | Soren Willemann, structured credit strategist at Barclays Capital said: “What we’re seeing now is real-money investors stepping into the market.”
In the past few weeks, the cost of protecting the safest slice, or “tranche”, of the index has begun to fall relative to the riskiest.
Analysts say the falling spreads indicate that new investors are selling protection on these “super senior” tranches.
Etienne Varloot, strategist at UBS, said several “sophisticated” pension funds were doing this trade. He said: “With the iTraxx hitting 150 basis points, selling protection on super-senior became so lucrative that it made sense to start doing it”.
He added that while the amount of activity from real money investors was relatively small, it was affecting spread levels.
Neil McLeish, credit strategist at Morgan Stanley, said new money was entering other areas of the credit markets, from CDS to cash to leveraged loans. |
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Credit Default Swaps Replies |
rffrydr
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| Posted: Thu Oct 27, 2011 2:07 pm Post subject: |
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Yeah...what he said:
| Quote: | Greek Sovereign CDS and the ISDA
By Daniel Dicker | Oct 27, 2011 | 11:21 AM EDT
After all the problems they've caused, the latest discussions I hear on CNBC arguing the need to maintain "market integrity" in sovereign debt credit default swaps borders on the insane.
This is all about the ISDA 'recognizing' that a 50% haircut on Greek debt represents, or doesn't represent, a 'default' triggering the full payout on these silly instruments.
You mean, I need to be worried about the banks who invented, sold, marketed, traded and now hold this crap that never should have existed in the first place and worry about whether this market remains viable and tradable??
Let it NOT be reliable, let it die, back to the dustbin of bad, bad, BAD financial engineering that has done nothing but made things worse for everyone.
And show me the ass willing to argue the other side of this. |
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rffrydr
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rffrydr
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| Posted: Thu Oct 27, 2011 7:19 am Post subject: |
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The Great Greek Bisecting won't trigger CDS...which will leave many legit buyers wondering what they're good for. Now the liquidity will drain away...naturally, through market forces. 
Good riddance. CDS on sovereigns should fade away. In europe it's a back door to a currency that doesn't exist. Just short the banks--oh, I forgot....
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rffrydr
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| Posted: Tue Oct 04, 2011 9:26 am Post subject: |
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AMEN:
| Quote: | Now, TMM have for some time felt that CDS on debt for countries that can print their own money is a lot like Magic Cards: an obscure game that can be expensively played by 30 year old man-children, who should be doing something else. On that basis we could make fun of most of the sovereign CDS market - US, Australia, Japan, you name it. But TMM feel that those who have pushed China CDS out over the last few months are a special bunch indeed. China has reserves of approximately $3 trillion and a grand total of $1.2bn in external borrowings at the sovereign level. Now, TMM know that China has a lot of NPLs - don't get us wrong - but those are in local currency. Ooooh, but what about SOE borrowings in USD? TMM would like to point you towards creditors to Vinashin, a hopeless Vietnamese shipping company, who appear to be 1) taking a big fat haircut 2) not getting control of the company and 3) now hold busted, useless paper that is not deliverable into sovereign CDS. The bottom line is, if they don't feel like paying you, they won't and your CDS won't pay out. This is EM credit 101: willingness to pay is often far more important than ability to pay. So anyone buying CDS on China is buying something that is collateralized about 2500x with cash and rising. Remember - China doesn't sell its reserves to print money to recap banks, it just expands the monetary base. Just like the Ber-nank.
TMM don't doubt for a moment that China CDS could widen further, much as Pets.com had its day in the sun and BP briefly went deep into the high yield zone. However, as a whole we are calling this trade what it is - deeply, profoundly, ridiculously stupid, poorly conceived and no doubt primarily owned by equity and corporate credit guys who've thought about it for around 2 seconds before putting this trade on, like thick pants, in the vain hope it will stem a haemorrhaging from their posteriors that makes Ebola look like Deep Vein Thrombosis. TMM would like to say to these people's investors that if you want to stop the bleeding caused by a portfolio disease known as tight monetary policy and poor corporate governance, then stop giving your money to credit analysts that can't analyze credit and equities analysts that can't analyze equities - Please! Don't buy China CDS. |
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nodoodahs
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| Posted: Fri Apr 29, 2011 7:56 am Post subject: |
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Felix Salmon had a nice little bit on Ecuador and its debt recently - possible tie-in to their manipulation of the CDS market in order to buy back some of their bonds at well below market a couple of years ago. Worth a Googling for.
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rffrydr
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| Posted: Fri Apr 29, 2011 6:16 am Post subject: |
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Europe takes on CDS market where it's weakest--the market part:
http://www.bloomberg.com/news/2011-04-29/goldman-sachs-jpmorgan-face-eu-antitrust-probe-of-cds-market.html
| Quote: | | It will also examine whether nine of the firms struck deals with ICE Clear Europe, a clearinghouse for derivatives, that block other clearinghouses from entering the market and give rivals “no real choice where to clear their transactions.” |
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rffrydr
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rffrydr
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rffrydr
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rffrydr
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| Posted: Wed May 19, 2010 4:25 pm Post subject: |
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rffrydr
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| Posted: Mon Apr 12, 2010 10:50 am Post subject: |
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Of course the traders give us liquidity (and the lack of a public clearing house gives banks spreads) but a start would be an outright removal of sovereign entities in this scheme and perhaps some sort of sliding trigger points for unhedged position sizes. In general however there is no way CDS can become THE market. That one has to go public.
Of cows, communities and credit default swaps
By John Kay
| Quote: | The French economist and businessman Michel Albert described two historical traditions from which the modern insurance industry originated. In London, English gentlemen would gather in Lloyd's coffee house to speculate on the state of the world and the weather. They would gamble on the fate of ships. Meanwhile, in Swiss mountain villages, farmers might agree that if one of their cows died, the whole community would contribute to provide a replacement.
Although this is a caricature, it contains a large element of truth. Insurance is partly a market in securities, partly a mechanism for collective action; a means by which risks are traded, but also a means by which risks are socialised. Even today, mutual organisation is much more common in insurance than in most business activities, especially in continental Europe: the recent decline of mutuality is linked to the global spread of Anglo-American financial institutions.
The 18th century saw a degree of convergence between the traditions of market and mutuality. The development of the theory of probability and the construction of mortality tables were critical. These innovations allowed a more scientific approach to risk assessment; the actuarial profession came into being. Life assurance could be based on objectively calculated premiums.
Yet it was still amusing, and for some profitable, to gamble on the life of particular individuals. King George III, who reigned for 60 years despite his uncertain health, was a favourite subject. A book was established on the fate of Admiral John Byng, the hapless British seaman who failed to relieve Minorca and was controversially shot, as Voltaire put it, "pour encourager les autres". But such wagers came to be seen not only as distasteful, but also dangerous. If large sums were riding on the death of Sir Hugh Walpole, someone might be tempted to hasten the outcome. Legislation established the concept of "insurable interest". One could take out a contract of insurance only if one would suffer identifiable loss from the occurrence of the insured event.
Life assurance today is a more respectable business (although if you want to bet on the health of Kirk Douglas or Pope Benedict, you can do so online). But the underlying issue is topical again: the subject is not the death of individuals but the death of corporations. A credit default swap is, in a sense, an insurance policy on a company.
The growth of the market for credit default swaps after 1997 relies on a legal opinion by Robin Potts QC. In Mr Potts' view of English law, such contracts are neither insurance (in which case purchases by traders who did not hold the relevant debt would have been illegal) nor gambling (in which case the contracts would, at least until the law changed in 2005, have been unenforceable).
Whatever the legal authority for Mr Potts' view, it makes little commercial or economic sense. If someone who buys a CDS is neither insuring – protecting himself against possible losses from the borrower's default – nor wagering – judging that the probability of default is greater than the odds implied by the market rate for a CDS contract – then what is the nature of the transaction?
Yet traders trade for no better reason than that is what traders do. It is difficult to believe that those who buy CDS protection on US Treasuries really imagine that the rate accurately reflects the probability of anything. They would have to believe not simply that the American government will default, but that when it does walk away from its liabilities, their counterparty will pay. Like the people who bought dotcom stocks or Florida property developments off plan, the purchasers are trading a security of uncertain and probably negligible fundamental value in the hope that they will be able to sell it on to someone else at a higher price.
Such asset bubbles generally collapse, although there are a few commodities – such as gold and Old Master paintings – for which dissociation of price and value seems permanent, with prices influenced only by sentiment and expectations about future prices. Holding these items is part insurance – the buyer hopes the asset may be worth something even in an apocalypse – and partly a means of attesting to one's great wealth.
But it strains language to breaking point to describe CDS transactions as anything but gambling. The traders in AIG's financial products division were inheritors of the amusements of Edward Lloyd's coffee shop rather than the values of Swiss farmers. With short sales of equities, the need to borrow stock limits positions to the extent of insurable interest. But not in the CDS market. This observation leads directly to the increasingly widely held view – most recently expressed in this paper by my colleague Wolfgang Münchau – that CDS transactions should be permitted if they are insurance but not if they are gambling. The argument is in essence identical to that which led to the establishment of the doctrine of insurable interest in 1745: "It hath been found by experience, that the making of insurances, interest or no interest, or without further proof of interest than the policy, hath been productive of many pernicious practices." Many things have changed since the 18th century, but many others have remained the same. |
johnkay@johnkay.comPost and read comments at www.ft.com/kay
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diesel
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| Posted: Fri Apr 09, 2010 6:01 pm Post subject: |
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http://blogs.reuters.com/felix-salmon/2010/04/09/the-magnetar-trade/
| Quote: | | Jesse Eisinger has found another hedge fund which was shorting mortgage CDOs, Magnetar. And it, too, avoided nasty phone calls from its investors by following a long-short strategy. But instead of losing billions, it ended up making them. Because while Morgan Stanley offset its short triple-B positions by going long the safest tranches, Magnetar offset its short positions by going long the riskiest tranches. |
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rffrydr
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| Posted: Thu Apr 08, 2010 10:24 am Post subject: |
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Lookie thar! "Beyond jurisdiction"--who'd a thunk it?
| Quote: | By Elizabeth Amon
April 8 (Bloomberg) -- A Deutsche Bank AG salesman’s trial began in the first case brought by U.S. regulators to target insider trading in credit-default swaps.
Jon-Paul Rorech, a bond and credit-default swap salesman at Deutsche Bank Securities, is accused of illegally feeding information on a bond sale to co- defendant Renato Negrin, a former Millennium Partners LP portfolio manager. Negrin bought swaps to reap a $1.2 million profit when the 2006 deal was announced, the Securities and Exchange Commission said in its complaint filed in May.
“This case, like all insider-trading cases, is a case about selective disclosure,” Richard G. Primoff, an SEC lawyer, said in his opening statement in the nonjury trial in New York.
Rorech, 39, and Negrin, 46, argue that the SEC has no jurisdiction over the credit-default swaps at issue because they’re private contracts, not securities. Their lawyers denied the accusations when the suit was filed.
The agency didn’t accuse Frankfurt-based Deutsche Bank or New York-based hedge fund Millennium of wrongdoing.
Rorech is on paid administrative leave from Deutsche Bank.
U.S. District Judge John G. Koeltl in Manhattan is hearing the non-jury the trial. He ruled in December that a trial was needed to determine whether the swaps at issue were based on securities, among other issues.
The commission’s suit focuses on efforts by Dutch media company VNU Group BV, later renamed Nielsen Co., to restructure its debt in 2006 as part of a 7.5 billion euro ($10 billion) leveraged buyout.
In July 2006, VNU, whose units include the Nielsen TV- ratings company, announced a $1.67 billion bond offer by subsidiaries. Investors were concerned that the bonds wouldn’t be covered by credit-default swaps on VNU’s debt, according to court papers.
On July 24, 2006, Deutsche Bank announced the offer would be restructured to include a 200 million euro tranche of bonds from the holding company that would be covered by the swaps.
The SEC said Rorech tipped Negrin about the restructuring before that announcement.
Negrin bought 20 million euros of swaps, and profited by selling them after the deal was announced and the swap price rose.
Rorech countered that the same information the SEC says he gave Negrin in those calls he gave to other customers on recorded calls, and that the information about the deal restructuring was speculative at the time.
Rorech had no legal duty to keep the information confidential, he argued in court papers. He couldn’t have breached his duty to Deutsche Bank when the bank wanted him to discuss the bond issue with potential buyers, he said.
Because he worked in the financial industry for 20 years, Negrin understood that Deutsche Bank had confidentiality policies, and “it never would have occurred to him that Mr. Rorech was giving him confidential information,” Negrin’s lawyer, Lawrence Iason, said in his opening statement.
The case is Securities and Exchange Commission v. Rorech, 1:09-cv-04329, U.S. District Court, Southern District of New York (Manhattan). |
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rffrydr
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| Posted: Fri Feb 12, 2010 9:52 am Post subject: |
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Yes, Ratings and CDS on sovereigns are probably too much of a good thing. Let this stuff go back to publicly traded futures markets and forget about it.
http://ftalphaville.ft.com/blog/2010/02/12/148251/and-so-it-begins/
No, it won't stop "runs" anymore than the absence prevented Asian contagion back in '98. But it will stop living the lie that these instruments are anything other and speculative.
This from Marc Chandler today:
| Quote: | ....Europe may be best served by using this crisis as an opportunity to develop a true European bond market. Now there is a German bond market, a French bond market, an Italian bond market but not really a European bond market.
The absence of a homogeneous bond market in Europe is also arguably one of the reasons that the euro's share of world reserves is very close to the share commanded by the ECU, the Deutsche mark and French franc previously.
A European bond could serve as a benchmark for the region. It could be used as a mechanism to ensure financing for countries such as Greece, with conditions that the European Commission enforces. The bonds could be guaranteed by a number of triple-A names, including Germany, France, the European Bank for Reconstruction and Development, and the European Investment Bank.
A European bond would avoid the pitfalls of the no-win situation of Greece: The country may only get assistance if it implements its austerity program, but if it does successfully implement its austerity program, it won't need assistance. A European bond also may minimize the moral hazard issues. |
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rffrydr
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| Posted: Tue Jan 12, 2010 8:53 am Post subject: |
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| Quote: | Howard Simons
Alcoa Credit Default Swap
1/12/2010 8:58 AM EST
Tom, thanks for pointing out the rise in Alcoa's CDS costs from 130 to 160 basis points. Is this what happens when a company disappoints with earnings these days?
I have always found this aspect of the CDS market a bit odd: What the protection buyers really want is health insurance, something with a continuous outcome, and instead find themselves buying life insurance with its, um, discrete outcome.
On the other hand, those looking for exposure to AA bonds and who are in the position to write these CDS can construct a nice synthetic AA bond by writing the CDS and receiving fixed on a swap. |
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