17 September 2014 by lberuti
The market has been aware that new CDS definitions would be introduced during the September 2014 roll since early this year. The new definitions will take into account new credit events, and will allow the delivery of a wider range of securities into a CDS once a default happens. That will enable the CDS to behave very much like the bonds they are supposed to track, and will enable them to avoid a few technical pitfalls that affected them previously. CDS referencing banks will be particularly affected pricewise, while CDS referencing corporates and insurance companies will see their valuations hardly changed. The marketplace has therefore imagined a protocol that will migrate existing insurance and corporate CDS towards new definitions automatically, while existing banks’ CDS will remain under the current documentation. But the sign up to the protocol has been slower than expected, and some counterparties have proved reluctant to adhere as they wanted some (not many, only a handful in fact) corporate entities to be excluded from the automatic migration. All this haggling has eventually delayed the process, and the new definitions will only apply from the 6th October, rather than on the 22nd September. Existing indices will follow the protocol, and the new series will include the new definitions. It is therefore no surprise that the series 22 in Europe and Asia, and the series 23 in the US will only be issued on the 6th October. Ahead of the introduction of the new documentation, liquidity has been more challenging and volumes traded during the first week of September on single names were closer to what we see around Christmas than what we usually see when the market comes back from the summer holidays. Let’s hope there will not be any further delay.