4.8.2009 |
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CDS Volumes Strong as Big Bang Changes Debut - Reuters
 By Karen Brettell NEW YORK -- U.S. credit default swap trading volumes were robust on Wednesday, easing concerns that an array of changes in pricing conventions and contract terms could dry up liquidity or bifurcate the market, traders said.
A slew of changes, dubbed the "Big Bang," were introduced that fix trading start and end dates on CDS contracts and require a greater upfront cost for entering into a trade.
They were designed to standardize trades and make them easier to insert into a central clearing house, which is viewed as key to removing systemic risks posed by the failure of a large CDS counterparty.
"Over the past few weeks, volume has been good and it remains strong today, especially considering we're heading into a holiday weekend," said Jason Quinn, co-head of high grade & high-yield flow trading at Barclays Capital in New York.
Some traders had expressed concerns that changes could provoke confusion and make investors reticent to trade until they felt more comfortable.
"I think the Street did a pretty effective job at educating the end user in the runup to the Big Bang so that there was a fairly steep learning curve technology-wise to get systems ready for today," said Jamie Cawley, Chief Executive at interdealer broker IDX Capital in New York.
"It seems to have gone off pretty well; our volumes are through the roof" Cawley said, adding that IDX traded three to four times the company's normal daily volumes.
CDS based on North American company debt now require a larger upfront payment and fix the annual payments of the contracts at a set cost, instead of requiring payments that would depend on the credit quality of the borrower.
For example, the cost to insure the debt of a company that previously had a spread of around 600 basis points, or $600,000 per year for five years to insure $10 million in debt, would now cost about 4.8 percent of the sum insured at the start of the contract, or $4.8 million to insure $10 million for five years, plus annual payments of $500,000.
"The biggest issue has been anticipation, because we're making significant changes to a market that's become accustomed to doing things a certain way for a long time," said Barcalys' Quinn.
"The changes will make it easier to clear trades, and we're going to be able to compress volumes drastically," he added. http://www.reuters.com/article/marketsNews/idUSN0854337720090408
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