Credit Default Swaps

Re: Credit Default Swaps

Postby winston » Sat Mar 10, 2012 6:18 am

Too complicated for my simple mind, so I will file it here, in case I want to refer to it again ...

As First Greek CDS "Anstalt" Appears, A Question Emerges: Did Banks Not Square Off Margins? by Tyler Durden

The irony is not lost on us that Bloomberg is reporting that KA Finanz, an Austrian bad-bank supported by the Austrian government, faces as much as a €1 billion need for funding to cover its exposures to Greek CDS .

In a statement this morning, which we noted in a tweet, the bank noted "activation of the CDS with an assumed loss ratio of about 80% would mean an additional provisioning charge of EUR 423.6 million".

KA Finanz's total amount of Greek CDS exposure is around EUR1bn.

What is shocking and should be of great concern is that we have been led to believe that very little net cash will change hands on the basis of the $3.2bn net aggregate market exposure.

This was based on the now false premise that variation margin was maintained and transferred throughout the process (as we note below from recent IMF filings).

http://www.zerohedge.com/news/first-gre ... re-margins
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Re: Credit Default Swaps

Postby winston » Fri Apr 06, 2012 12:01 pm

JPMorgan Trader Iksil’s Heft Said to Distort Credit Indexes By Stephanie Ruhle, Bradley Keoun and Mary Childs

A JPMorgan Chase & Co. (JPM) trader of derivatives linked to the financial health of corporations has amassed positions so large that he’s driving price moves in the $10 trillion market, traders outside the firm said.

The trader is London-based Bruno Iksil, according to five counterparts at hedge funds and rival banks who requested anonymity because they’re not authorized to discuss the transactions. He specializes in credit-derivative indexes, a market that during the past decade has overtaken corporate bonds to become the biggest forum for investors betting on the likelihood of company defaults.

Investors complain that Iksil’s trades may be distorting prices, affecting bondholders who use the instruments to hedge hundreds of billions of dollars of fixed-income holdings. Analysts and economists also use the indexes to help gauge perceptions of risk in credit markets.

The trader may have built a $100 billion position in contracts on Series 9 of the Markit CDX North America Investment Grade Index, according to the people, who said they based their estimates on the trades and price movements they witnessed as well as their understanding of the size and structure of the markets.


http://www.bloomberg.com/news/2012-04-0 ... dexes.html
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Re: Credit Default Swaps

Postby winston » Wed Apr 11, 2012 11:18 am

Euro Area Credit Stresses Are Coming Back
Author: Pater Tenebrarum


Selected Credit Market Charts – Ominous Developments

Below is a selection from our usual credit market chart update – CDS on various sovereign debtors and banks, bond yields, euro basis swaps.

Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Friday's close – European markets are closed today on account of the Easter Monday holiday.

We decided to post this selection to show recent developments especially in Spain, but also to point out that our euro-land bank CDS index is breaking higher – a very ominous development.

Clearly European credit markets are once again under increasing tension. For instance, CDS on Spain have now almost returned to their previous highs and we know from past experience that bond yields tend to follow CDS spreads.

Moreover, we can now see the first signs of contagion effects in CDS and yields on other European sovereigns.

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5 year CDS on Portugal, Italy, and Spain – note the big jump in CDS on Spain on April 5 – they are now almost back at their previous high – click chart for better resolution.

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5 year CDS on France, Belgium, Ireland and Japan – here we can see that other euro-land CDS are becoming 'infected' again as well. Contagion seems to be coming back into play - click chart for better resolution.

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Three month, one year, three year and five year euro basis swaps – a sudden turn for the worse - click chart for better resolution.

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Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – this is an especially important chart in our opinion. The recent break higher in this index is bad juju indeed - click chart for better resolution.

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10 year government bond yields of Italy, Greece, Portugal and Spain – suddenly yields are shooting higher in unison again, with the other weak euro-land sovereigns following Spain's yields higher - click chart for better resolution.

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Conclusion:

We must be alert to the possibility that the pause in the euro area crisis may be over. If that is the indeed the case, then a rocky period for 'risk assets' may lie directly ahead.

Of course we can not guarantee that this is what is happening – the markets may yet pull back again and reveal these recent moves to be merely corrective in nature.

However, the economic situation Spain finds itself in is well known for being quite grim at this stage. As we have chronicled in these pages, the banking system is in dire straits, notwithstanding ample liquidity provisions by the ECB.

Unless something happens fairly quickly that convinces market participants that the danger is once again postponed, this is a situation that could very quickly get out of hand again. In fact, if we were to bet, this is what we would be inclined to expect

http://www.acting-man.com/?p=16244
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Re: Credit Default Swaps

Postby winston » Thu Apr 19, 2012 8:21 am

Deutsche Bank: "Worst is yet to come" in global financial crisis

The worst may be yet to come in the global financial crisis , as the central bank spending that kept defaults low runs out, according to Deutsche Bank AG. (DBK)

Credit-default swap prices imply that four or more European nations, may suffer so-called credit events such as having to restructure their debt, strategists led by Jim Reid and Nick Burns said in a note.

The Markit iTraxx SovX Western Europe Index of contracts on 15 governments including Spain and Italy, jumped 26 percent in the past month as the region’s crisis flared up.

"If these implied defaults come vaguely close to being realised then the next five years of corporate and financial defaults could easily be worse than the last five relatively calm years," the analysts in London said.

"Much may eventually depend on how much money-printing can be tolerated as we are very close to being maxed out fiscally."

Default rates stayed in line with historical norms between 2007 and 2011 because of the "unprecedented intervention" of European and U.S. policy makers, the analysts wrote in the report yesterday.

Now, credit markets are giving up the gains that followed the European Central Bank's 1 trillion-euro ($1.3 trillion) longer-term refinancing operations and the U.S.'s Operation Twist that buoyed government bonds.

Although defaults have been low, recoveries are falling because the public spending that kept non-payments down has failed to spur economic growth, according to the analysts.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

"The LTROs gave us some respite but they don't appear to have taken the problem away," Burns said in a phone interview. "At the moment there are no more LTROs on the table."

Source: Bloomberg
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Re: Credit Default Swaps

Postby winston » Sat Sep 22, 2012 6:51 am

Don’t Fear Another Financial Collapse Until This Indicator Soars
Author: Wall Street Daily

Maybe the financial collapse is right around the corner then? Or not.

While chatter about it certainly keeps increasing, the most reliable indicator of impending financial doom isn’t signaling any trouble ahead.

Turns out, Credit Default Swaps (CDS) – which represent the cost of insurance against a default – are falling precipitously in the financial sector.

You’ll recall, spiking CDS prices preceded the Great Recession and all the European bailouts. So the next time someone tries to scare you stockless about a financial collapse, check out CDS prices before you even think about believing it.



http://www.yolohub.com/economy/dont-fea ... ator-soars
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Re: Credit Default Swaps

Postby winston » Thu Jun 27, 2013 8:29 am

Chinese Sovereign Risk Spikes Most Since Lehman by Tyler Durden
06/25/2013

With the nation's short-term funding markets in crisis mode - no matter how much they are jawboned about temporary seasonal factors - it seems yet another indicator of stress is flashing the red warning signal.

China's sovereign CDS has spiked by the most since Lehman in the last 3 days - up 55% to 140bps.

This is the highest spread (risk) in 18 months and looks eerily similar to the period around the US liquidity market freeze. Hedging individual Chinese bank counterparty risk is hard (given illiquidty) and so it would seem traders are proxying general risk of failure via the nation's sovereign risk (and stocks which also languish at post-Lehman lows).

On a related note, Aussie banks have seen there credit risk rise 50% in the last month as they suffer domestically and from the China contagion.


http://www.zerohedge.com/node/475681
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Re: Credit Default Swaps

Postby winston » Thu Sep 05, 2013 6:46 am

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Re: Credit Default Swaps

Postby winston » Sat Jan 03, 2015 3:18 pm

Credit insurance

Along with the increased US Treasury yields, the cost of insuring against corporate credits going bad is also going up.

The cost of insuring investment grade US corporate credit against default has become 20pc more expensive, rising from lows of 55 to 66 since July, according to Markit.

Source: The Telegraph
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Re: Credit Default Swaps

Postby winston » Thu Nov 03, 2016 9:07 am

China - CDS

China reportedly conducted its first credit default swap or CDS transaction on Monday.

After several bond defaults since 2014, more and more bond holders are now keen to buy insurance products.

What is a CDS? It is a financial swap agreement under which a CDS seller agrees to compensate buyer, usually the creditor of the underlying bond, in the event of a default by the debtor or some other credit event.

In the event of default, the investor in a CDS receives compensation, usually the bond's face value, and the CDS vendor takes possession of the bond that goes into default.

Total borrowings of Chinese firms stand at US$18 trillion (HK$140.4 trillion), of which US$7.5 trillion are in the form of issued bonds.

On Monday, 10 financial institutions forged 15 CDS deals worth 300 million yuan (HK$344.27 million), marking the first ever interbank transactions in China.

This is a milestone for China's capital markets. A mature bond market should always have an associated CDS market.

Bankers had been criticized for coming up with complicated derivatives products, cited as culprits that led to the financial crisis in 2008/09 marked by numerous participants unaware of the extent of their exposure to the now defunct Lehman Brothers.

Nowadays, CDS and interest rate swaps are mainly used for hedging as most buyers opt for simple plain vanilla products.

Source: Dr Check, The Standard
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Re: Credit Default Swaps

Postby winston » Mon Sep 04, 2017 7:29 am

China faces risk of financial tsunami

Credit default swap products sent many a financial firm to the edge of collapse in 2008, and almost 10 years after that financial tsunami no one can believe it that another potential CDS crisis is threatening markets again - in China.

The 194-strong Chinese Financing Guarantee Association is the one that oversees CDS product issuers.

With Beijing committed over the past few decades to providing credit guarantees to small and medium-sized enterprises, Fannie Mae and Freddie Mac, despite the threat these US giants posed in 2008, have been models for Chinese development.

In good times, the CDS market chugged along. Loan-guarantee firms charged a 2 to 3 percent service fee, and since there was little chance of defaults, there was no risk to them.

But with rising risks amid the slowdown, the threat of defaults have loomed over them.

And since 2012, as default rates rose, a lot of them disappeared.

Chinese CDS products are very different from US ones, and their problems may be more than in the United States.

China's CDS market is worth US$500 billion (HK$3.9 trillion), and that does not include guarantees for SME bonds, so the size of the problem is bigger.

With the increase in default problems, a lot of guarantee firms began to be bothered by how to remove all kinds of long-term guarantees and by how to sell back collaterals.

Sure, CDS market developments did make a lot of banks face fewer loan risks. But if the CDS market collapsed, like in the US, won't there be a domino effect and a threat to China's financial system?

The market seems too optimistic now.

Andrew Wong is
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