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Wednesday, March 4, 2009
Intercontinental Exchange Is Now Clear To Clear CDS Trades
The Federal Reserve Board has approved the proposal of Atlanta-based Intercontinental Exchange (ICE) to be CDS clearinghouse. The SEC is expected to follow promptly in its approval as well. As counterparty risk is thus set to be eliminated, CDS spreads will likely widen dramatically and the CDS basis trade will collapse over the next few months as CDS and bond spread converge.
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9 comments:
Wouldn't spreads narrow?
LOVE THIS BLOG!
You're doing great work, man.
So is ICE a CDS clearinghouse or is it the CDS clearinghouse? And will OTC CDS still be allowed?
its just centrally cleared. not an exchange. also cds, imho, should prob go wider. think about it. if i owned protection and I thought there was some chance you couldn't pay me if a credit event took place, would I pay you more or less for protection? prolly less. now that cp risk has been mutualized, i would pay more, knowing that there's higher likelihood i'd get paid....basis should likely narrow as td has been pointing out...
CDS will be just like futures now...ultra low margin, liquid, and useful hedging devices. In their old form there were a joke and dangerous.
Tyler - will this change the arbitrage dynamic you've pointed out in previous CDS settlement auctions?
Clearinghouse will cause spreads to widen substantially due to upfront post of collateral by any counterparty to ICE. read bullet 3 in the linked basis arb article. Also, this should not have an impact on settlement auction as those are cash product derivatives which benefit from legacy net selling of protection on defaulted names
As the negative basis trade disappears, will this make traders less willing to hold corporate bonds, pushing down their price, all else being equal?
if anything bonds would have to be purchased for the spread to converge somewhere inbetween (bond z spread would tighten as price goes up to meet with cds spread which is going wider). i dont see a bond selloff as a result of a clearinghouse
this will be another one of those "who could have predicted" debacles.
The ICE clearinghouse is made up of such finacial powerhouses as BAC, C, UBS, GS, and JPM.
Two (BAC/C) are defacto entities of US government and two (JPM/GS) survive on taxpayer largesse via such firms as AIG.
This is more of a Potemkin Village to show the masses that dealers are behaving themselves and why we should provide them with more billions.
ICE has as much ability to liquidate a CDS in a volatile market than as Tim Geithner has in computing his taxes.
Corporate bond spreads reflect both liquidity and credit. The notion that CDS spreads = bond spreads implies that liquidity is zero!
Surely, you jest!
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