Credit Default Swap Auctions - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Credit Default Swap Auctions

May 2009 Number 372

JEL classification: G10, G13, G33

Authors: Jean Helwege, Samuel Maurer, Asani Sarkar, and Yuan Wang

The rapid growth of the credit default swap (CDS) market and the increased number of defaults in recent years have led to major changes in the way CDS contracts are settled when default occurs. Auctions are increasingly the mechanism used to settle these contracts, replacing physical transfers of defaulted bonds between CDS sellers and buyers. Indeed, auctions will become a standard feature of all recent CDS contracts from now on. In this paper, we examine all of the CDS auctions conducted to date and evaluate their efficacy by comparing the auction outcomes to prices of the underlying bonds in the secondary market. The auctions appear to have served their purpose, as we find no evidence of inefficiency in the process: Participation is high, open interest is low, and the auction prices are close to the prices observed in the bond market before and after each auction has occurred. We qualify our conclusions by noting that relatively few auctions have taken place thus far.

Available only in PDF PDF

25 pages / 182 kb

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