Dan Alderson's article on single name Credit Default Swaps is very much worth reviewing for all high-yield cash and derivative traders. While it is very complicated, from my perspective that is one of the main points. Dan makes the following observations: "The International Swaps & Derivatives Association will imminently publish findings of an independent review of the Credit Derivatives Determinations Committees, which it created back in 2009 when it hardwired credit event auctions into CDS settlement as part of the Big Bang Protocol." "This is pertinent when various distressed corporate borrowers — Altice, Ardagh, Atos and Intrum among them — are credit event candidates." "Crucially, any changes to DC rules require the backing of a supermajority of its members. That presumably puts a rather hefty obstacle in the way of any proposal to, say, completely replace the DC with another mechanism." "Isda, which used to oversee the DCs, moved to disassociate itself in the post-crisis years. In October 2018, it transferred its secretary role to DC AdministrationServices, which has ‘management support services’ from Citadel SPV — a somewhat mysterious entity not affiliated with Citadel Americas." “The current system is not good for those market participants that are not part ofthe DC but it also puts a huge burden and risk on DC members,” says Carlos Pardo, an independent CDS specialist who advises on credit event matters. “It is preventing the volumes from recovering but the need for the product is there.” "The Europcar auction in January 2021 was loudly lambasted in the press (lapping up the outrage of unnamed sources) for returning a 100% recovery price. It turned out the reason this came unstuck was because so many opportunists piled into shorting the name, once the credit event question had been raised, that orders outstripped available bonds. Those who had been short before on a genuine credit conviction had long since cashed out, before the auction operated exactly as its rules dictated." These are mostly the same issues we had in trading single-name CDS before the GFC. Furthermore, prices even for on-the-run 5y contracts are traded OTC and the trades are not posted on a public exchange, nor are historical prices freely or easily available. For off-the-run contracts, this problem is exacerbated. The majority of single-name CDS trades/traders are seeking to manage spread risk rather than default risk. However, the complexity of this product increases meaningfully once the paradigm shifts from trading with a focus on spread to an imminent default scenario and recovery analysis. #cds #derivates #isda
Orlando Gemes’ Post
More Relevant Posts
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CFTC Fines Goldman Sachs, JPMorgan Chase, and BNY Mellon $50 Million for Swap Reporting Failures The Commodity Futures Trading Commission (CFTC) recently ordered three financial institutions to pay over $50 million for swap reporting failures and other violations. The CFTC found that Goldman Sachs, JPMorgan Chase, and BNY Mellon failed to properly report swap transactions to swap data repositories (SDRs). The CFTC's order includes a number of findings, including: Goldman Sachs failed to properly resource and prioritize CFTC compliance, which resulted in violations that permeated numerous components of Goldman's swap dealer business. Goldman Sachs' swap data reporting failures were so significant that they are the first CFTC case with this volume of errors. Goldman Sachs also did not provide accurate Pre-Trade Margin Model Margins (PTMMMs) to counterparties on over 1 million occasions. JPMorgan Chase's swap reporting errors covered both underreporting and misreporting. JPMorgan Chase underreported over 150,000 constituent FX spot transactions and incorrectly categorized certain FX forwards as FX spot transactions. JPMorgan Chase also misreported over 15 million collateralized FX, interest rate, and commodity swaps as if they had been uncollateralized. BNY Mellon failed to document or effectively report nearly 4 million swap transactions to SDRs. BNY Mellon's swap reporting failures were due to 25 types of errors that primarily involved swap allocations. Insights on PTMMMs and FX Spot and Forward Transactions: A Pre-Trade Margin Model Margin (PTMMM) is a margin requirement that is calculated before a swap trade is executed. PTMMMs are designed to reduce the risk of counterparty default. The CFTC requires swap dealers to provide PTMMMs to their counterparties for all swap trades. PTMMs can change over time because the risk of a counterparty default changes. For example, if a counterparty's credit rating deteriorates, the PTMM will likely increase. Financial institutions must make sure that they have adequate systems and processes in place to calculate and provide accurate PTMMMs to their counterparties. A spot transaction is a contract to buy or sell a currency at a specific rate on a specific date. Spot transactions are typically settled within two business days. A forward transaction is a contract to buy or sell a currency at a specific rate on a future date. Forward transactions may be settled for any time period, but they are generally settled for one month to 365 days. One of the key differences between spot and forward transactions is that spot transactions are settled for the current market rate, while forward transactions are settled for a rate that is agreed upon at the time the contract is entered into. This means that forward transactions are subject to price risk.
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It is clear to market participants that the short-term debt markets have become illiquid and unstable. The SEC has proposed a Treasury-based repurchase agreement clearinghouse to stabilize these markets. There are two problems with the proposal, Adding a new Treasury repo clearinghouse will not be profitable. Moreover, a stand-alone clearinghouse will not be sufficient to stabilize short-term debt markets. Explaining that a better alternative would be an exchange that trades both spot repos and repo futures. #repo #sec #futures
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The SEC wants exchange management firms to open trading in Treasury repurchase agreements. There has not been much of a response to date. This post describes a combined futures and spot market for Treasury repo that could open the repo market to retail and institutional traders on an equal footing with bank repo dealers. #repo #risk #futures
An Aggressive Response to the SEC’s Call for A Repo Clearinghouse - TabbFORUM
https://tabbforum.com
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With T+1 just 6 months away, this is a great article by Colin Lambert discussing market opinion over the impending change and the impact on #FX. Discussing how the change could affect settlement our Alex Knight explains #DLT can be used to help firms achieve the necessary settlement timeframes without introducing additional risk with “Proven solutions (that) allow a full PvP settlement process, with netting, to be completed on demand and within minutes, enabling the settling parties to benefit from the instantaneous exchange of ownership, including for same-day settlement.” via The Full FX: https://lnkd.in/eqaizWwU
The Uncertainty of T+1 - The Full FX
https://thefullfx.com
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Reminder: Securities Settlement Cycle Moves to T+1 on May 28, 2024 The amendments to Rule 15c6-1 that the SEC adopted to shorten the standard settlement cycle for most securities transactions from T+2 to T+1 will become effective on May 28, 2024. After that date, parties will have one business day to settle after the trade date, subject to certain exceptions. This change follows SEC amendments to Rule 15c6-1 in 2017 that shortened the settlement cycle from T+3 to T+2 and is consistent with the general trend toward shorter settlement cycles over time. We expect that parties will continue to agree to longer settlement cycles in many transactions, particularly high yield debt offerings and more complex transactions. Ultimately, however, transacting parties can expect settlement periods to shorten over time as the market becomes accustomed to T+1 settlement. After the earlier move from T+3 to T+2, issuers gradually became more likely to request shorter settlement, even where a longer settlement period would have been accepted by the market. In any event, the move to shorter settlement cycles will require practitioners to draft closing documents and make other closing arrangements in advance of pricing, or even in advance of launch, to avoid settlement issues at closing. Read our memo for further information: https://lnkd.in/giZzcnxC
Reminder: Securities Settlement Cycle Moves to T+1 on May 28, 2024
stblaw.com
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The immediate aftermath of the launch of T+1 settlement in the US on May 28 suggests the acceleration has not yet translated into increased FX risk, but it is too early to assess the longer term impact | #foreignexchange #fx #capitalmarkets #FXrisk #settlement
T+1 worst fears not playing out in FX so far
euromoney.com
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T+1 - CLS will decide in the first quarter of 2024 if it can delay settlement instructions for currency trades. "Should it conclude the change is possible, a solution could be implemented likely after the May 28, 2024 deadline for settling U.S. equity transactions one day after the trade (T+1)" https://lnkd.in/exVitpBz
CLS to decide whether to delay FX settlement cutoff in Q1
dailymail.co.uk
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JSE Clear has introduced a new service to accept securities as collateral against open JSE derivative positions. Previously, only cash was accepted as collateral. By now accepting SA government bonds as collateral, investors are able to utilise their cash for different purposes, alleviating cash liquidity pressures and reducing their costs of cash funding. JSE Clear will hold securities as collateral by adopting the 'pledge' mechanism which means that the investor retains ownership of the securities, and entitlement to related coupon payments, at all times. The assets will be ring-fenced and separated from the other assets of JSE Clear, thereby optimising protection of the investors’ assets. Initially, the securities collateral service will be available to cover 30% of total collateral requirements in the Equity and Currency Derivatives markets. JSE Clear intends to increase this percentage in the future, to consider a wider range of eligible securities, and to roll out the service to the Commodity and Interest Rate Derivatives markets.
JSE Clear to accept securities as collateral to improve investors’ cash liquidity.
jse.co.za
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Wealth Management I Hedge Funds I Private Equity I Portfolio Strategy I Asset Allocation I Real Estate I Offshore Funds
The National Stock Exchange (NSE) has cut the lot size of Nifty 50's derivative contracts by half. The NSE through a circular issued on April 2 said that Nifty 50's contracts' lot size has been cut from 50 to 25. Lot sizes of Nifty Financial Services or FINNIFTY has been cut from 40 to 25, and that of Nifty Midcap Select or MIDCPNIFTY has been cut from 75 to 50. The lot size of contracts of Nifty Bank or BANKNIFTY has been left unchanged at 15. All Nifty contracts i.e. weekly, monthly, quarterly, and half yearly expires available for trading from trade date of April 26, 2024, onwards will be with the revised market lot size. For Nifty 50 derivatives The circular said that there is no revision in market lot of monthly expiry of April 2024 expiring on April 25, 2024, expiry. All new contracts generated from end of the day of April 25, 2024, and available for trading from April 26, 2024, onwards will be with the revised market lot size. The first weekly expiry contract with revised lot size will expire on May 2, 2024. The first monthly expiry contract with revised lot size will expire on May 30, 2024. For Nifty Financial Services There is no revision in market lot of existing monthly expiries, expiring on April 30, 2024, May 28, 2024, and June 25, 2024. The first monthly expiry contract to have revised market lot will be July 2024 expiry, expiring on July 30, 2024. There is no revision in market lot of weekly contracts with expiry date up to July 23, 2024. All Weekly Contracts with maturities from August 2024 onwards (i.e. weekly contract with expiry date of August 6, 2024 onwards) will have revised market lots. The day spread order book will not be available for the combination contract of May 2024 July 2024 and June 2024 July 2024 expiries. For Nifty Midcap Select There is no revision in market lot of existing monthly expiries, expiring on April 29, 2024, May 27, 2024, and June 24, 2024. The first monthly expiry contract to have revised market lot will be July 2024 expiry, expiring on July 29, 2024. There is no revision in market lot of weekly contracts with expiry date up to July 22, 2024. All Weekly Contracts with maturities from August 2024 onwards (i.e. weekly contract with expiry date of August 5, 2024 onwards) will have revised market lots. The day spread order book will not be available for the combination contract of May 2024 July 2024 and June 2024 July 2024 expiries. #nse #markets #equity #trading #finance #india
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Swaps are financial derivative agreements where two parties exchange cash flows or liabilities from different financial instruments. They are traded over the counter and involve a high chance of counterparty default. Types include interest rate swaps, currency swaps, debt-equity swaps, and credit default swaps. 1. Interest rate Swap: An interest rate swap is a financial contract between two parties, involving the exchange of interest rate cash flows or payments over a specified period. The parties agree on terms, including the notional amount, fixed and floating interest rates, and the frequency of payments. This helps manage interest rate exposure and achieve financial objectives. 2. Currency Swap: A currency swap is a financial contract between two parties that involves the exchange of cash flows or financial instruments in different currencies. It helps manage exchange rate risk, access foreign capital markets, exploit arbitrage opportunities, and manage cash flow. It is widely used by multinational corporations, financial institutions, and governments. 3.Debt-Equity Swap: A debt-equity swap is a financial transaction where a company exchanges debt securities for ownership equity, allowing creditors to convert their claims into shares. This can reduce debt burden, boost balance sheet, and provide creditors with decision-making power. 4. Credit Default Swap (CDS): Credit Default Swaps (CDS) are financial derivative contracts that allow investors to offset their own credit risk with another investor's. They offer insurance against a specific entity's default. CDSs serve risk management, speculation, and arbitrage, but can be complex and carry risks, as seen during the 2008 financial crisis. #Arbitrage #Settlement #margins #Clearinghouse #Clearinghouse #ExoticDerivatives #FinancialInstruments #UnderlyingAsset #Volatility #counterpartyRisk #MarketRisk #NotionalValue #RiskManagement #Speculation #Derivatives #options #forwards #future #forwardscontract #DebtEquityswap #CreditDefaultSwap #Currencyswap #Interestrateswap #CommodityDerivatives #EquityDerivatives #hedging
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Managing Director - Client Financing at Credit Suisse
1moMy 2c: Taking the DC away from the dealer/buyside community into the hands of lawyers/bureaucrats will just kill the product. It's hard enough for dealers to trade this given how much the CDS product has been demonized by mass media and regulators. That's why many banks stepped out of the business because these days it's not liquid and profitable enough for all banks to support market making in CDS. Committing time and resources to the DC is an extra overhead on top. Hence only the real committeed 12 players are the ones left on the DC. The product though works as documented with all it's moles and warts. CDS is not really designed for smaller players who don't know what they are doing. The intuitive quotes, the ease of trading and the short form trade confirmation lulls "tourists" into believing this is a simple credit hedge. It's not. It's a separate fairly complex short credit derivative contract. I think the traders need to continue to bring context to proceedings of the DC because trading history of a given name is an important input into the settlement process. Leaving it to just to lawyers will lead to litigation not a solution. Fingers crossed CDS will evolve again for the better in response to these latest events.