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What Is CDS? (Credit Default Contract)

2008/10/18 14:04:00 41825

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　　隨著美國金融危機(jī)的逐級展開，華爾街成為世人矚目的焦點(diǎn)，CDS市場--這個人們并不十分熟悉的名稱屢屢牽動敏感的神經(jīng)。那么，這到底是一個什么樣的市場？它現(xiàn)狀如何，在這次危機(jī)中扮演著怎樣的角色呢？

The CDS market is the credit default swap market.

CDS is a contract, full name credit default swaps, meaning credit default contract.

CDS is a fairly common financial derivative tool in the United States, which was first established in 1995.

CDS is equivalent to a kind of insurance for creditors' claims: A company borrows money from B bank, and B earns interest from it; but if A fails, B may not even have the principal.

So the financial company C provides insurance for B, and B pays C premiums every year.

If A goes bankrupt, C will guarantee the principal of B bank; if A is paid on time, the premium of B will be C's profit.

But there are hidden problems.

It is mainly that such pactions are not regulated by any stock exchange, and are directly interchanged among counterparties, known as Over-the-counter (OTC).

That is to say, at the time of initial CDS, there is no mechanism check to ensure that C has sufficient reserve capital.

This approach gradually became a passion for brokerages, insurance companies, social security funds and hedge funds.

In recent years, the reference of this derivative has expanded to interest rate, stock index, weather, oil price, and so on, giving birth to the Interest Rate Swap (IRS) market and the Equity Default Swap (EDS) market.

At the same time, the original purpose of risk diversification is also replaced by risky gambling.

With the escalation of more than a year's credit crisis, the CDS market for credit default swaps in credit markets has started to shrink.

The international swap and derivatives Federation (ISDA) began investigating the size of the CDS market in 2000, when it was $630 billion, reaching its peak by 62 trillion at the end of 2007, and nearly 100 times in 7 years.

According to the latest announcement of ISDA in September 24th, the CDS market size dropped to $54 trillion and 600 billion in the middle of this year.

This is the first decline in a half year survey.

One of the reasons for the shrinking market size of CDS is that major banks and investment banks classify similar repetitive CDS pactions in order to reduce risks and complicated procedures, and replace them with a few equivalent pactions. This procedure is called "tearing" ("Tear-up").

However, such "tearing up" does not substantially reduce the risk of CDS.

In fact, data from MarkIt, another data provider in the CDS market, showed that the volume of CDS pactions increased from 1 to June in the first half of this year, though far below the record level in 2006.

At the end of December last year, the Bank of International Settlements BIS said that the net risk of the CDS market was 3.5% of the CDS market size, and the net risk at the end of June was US $2 trillion and 500 billion.

This is not included in counterparty risk.

The second reason for the shrinking size is that since the collapse of Bell Sten's two funds in July last year, the liquidity of the CDS market has been greatly reduced. Very few counterparties are willing to buy new risks (selling insurance), and the pactions are very light. The main task of CDS traders is to hedge the current risks.

The third reason for the shrinking size is the collapse of Bell Sten in March.

Bell Sten is the main provider of circulation in the CDS market. He controls trillions of dollars in pactions. Many of his rivals before the crash terminate those pactions or turn them into other counterparties.

The fourth reason for the shrinking size is that many hedge funds engaged in CDS trading were closed last year and this year because of losses.

The market survey of ISDA is in early August. If we look at the Lehman bankruptcy, we will believe that the market will shrink further because of the above third reasons.

Most of the price of CDS depends on the rating of bond rating agencies. The three big rating agencies are S & P, Moodie and Fitch. When the market is stable, the CDS premium of the premium rated bonds is relatively low. Junk bond CDS needs to be secured at the beginning of the paction. (Upfront).

Although the market size of CDS is larger than that of the world stock market of 51 trillion US dollars, it is far from active in the stock market.

First of all, the average face value of a CDS paction is millions of dollars, much higher than that of ordinary stock pactions. Moreover, CDS pactions often do not pfer funds in a few days, but on the 20, 3, 6, 9, and December, the premium is paid regularly until the expiration date of the paction, and the premium is only a fraction of the trading denomination. Secondly, CDS is traded between counterparties, which is a counter paction. There is no unified exchange, and the price is opaque. It is completely negotiated between the two sides and the regulators do not know. Again, CDS traders are investment institutions, and retail investors can not enter the field.

The trading volume of the 17 main brokerages accounts for 90% of the total market size.

The circulation of CDS market is also not active. The CDS Department of a major brokerage company has only tens or hundreds of CDS pactions with a single bond as reference.

A paction should be repeated by sellers and traders.

In addition, even if the counterparty does not default temporarily, if the risk is much greater than the risk that it can compensate, it will be increased by the other party's assets to cope with the situation.