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Let me say something in favor of 危言 -- parisparis - (3462 Byte) 2008-10-16 周四, 05:00 (633 reads) |
jeepguy
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作者：jeepguy 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
The net exposure of CDS is supposed to be 2 percent of the nominal amount. In Lehman's case, the payout for CDS seller is 91 cents on the dollar, but most would expect the net exposure of 400 billion Lehman CDS is about 6 - 7 billion, which is not that a huge amount.
Of course, we have wait till 10/21 the payout date to see if that is really the case.
According to the following article, ISDA estimates that the net pay out for all $62 trillion dollar CDS is only $15 billion.
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In the Trillions Of Dollars
The BIS estimates $62 Trillion CDS outstanding in 07 (approx 5x the U.S. national debt and more than 3x U.S. GDP).
The following is more or less summary of Pickle's argument;
"ISDA: the $50trillion "notional" or nominal amount calculates each CDS contract separately. If offsetting trades are factored in, a recent Fitch Survey estimates net exposure at less than $1trillion. Factor in a probability of default of 2% and a 25% recovery rate and protection sellers would have to settle an aggregate $15bn of losses."
One of the justifications for bailing out Bear Sterns was that its role as major counter-party in a $62 Trillion CDS market was simply too widespread, but Lehman appears to be right up there with BS.
So what happens if a major counterparty defaults?
The ISDA argues that the over-the-counter system is by now sophisticated enough to deal with such an event. Especially since the development of CDS index trading in 2004 and the entry of hedge funds in this by now very liquid market, several infrastructure improvements have been put in place to make this OTC market as secure and efficient as an exchange-traded derivatives market. In particular, there are 3 possibilities for market participants to exit a trade:
“First, the parties can agree to a termination (or tear-up), under which they agree to extinguish the original obligation following payment.
Second, one party can enter into an offsetting transaction, which leaves the original transaction in place but effectively cancels out its economic effect.
Finally, a party can enter into a novation, also known as an assignment, under which the party (transferor) transfers its rights and obligations under the transaction to a third party (transferee) in exchange for a payment. Following the novation, the parties to the transaction are the transferee and the remaining party.”
As novation requires the consent of the parties involved, the increase in trading volume caused the famous “backlog” that has since been resolved through electronic consent via email or automatic termination of a contract. “According to the New York Fed, by September 2006 the 14 largest dealers had reduced the number of all confirmations outstanding by 70 percent and of confirmations outstanding past 30 days by 85 percent. Further, the dealers had doubled the share of trades confirmed electronically to 80 percent of total trade volume.” This suggests that in an event of default one dealer’s contracts could thus swiftly be assigned to other dealers.
In terms of additional margin and collateral requirements this would cause the new counter-party, the ISDA points out that a dealer’s collateral requirements are calculated on a dealer’s net exposure, not on the number of contracts a dealer has outstanding (face value of contracts outstanding = gross exposure.) Indeed, the ISDA’s CEO Robert Pickel pointed out on several occasions that once offsetting trades are factored in among the $62 trillion gross CDS market volume, the market’s net exposure is much smaller.
Chicago Fed economists Robert Bliss and George Kaufman on the other hand are less sanguine about the systemic risk emanating from the CDS market’s sheer size. They warned already back in 2005 that netting (i.e. calculate margin against net exposure per counterparty, not per each CDS contract), cash settlement, and regulatory legislation granting extraordinary seniority to credit derivatives counterparties (i.e. close-out) may not completely neutralize systemic risk arising from the sheer CDS market size exceeding underlying assets by a factor of 10. Netting might actually increase systemic risk by favoring counterparty risk concentration.
Importantly, the authors point out that when considering effects of major dealer's default, the gross number of contracts that need to be unwound and replaced becomes relevant. Moreover, there are limits to the amount of exposure counter-parties allow themselves with a single institutions. These limits might be breached if one major dealer defaults. And the collateral adjustment for the new counter-parties (if they are prepared to take on the additional exposure) might lead to fire sales and asset market disruptions.
The fallacy of the notion that netting reduces systemic risk is ultimately recognized in the confessions of a risk manager published recently in the Economist: "We had not fully appreciated that 20% of a very large number can inflict far greater losses than 80% of a small number."
作者：jeepguy 在 海归商务 发贴, 来自【海归网】 http://www.haiguinet.com
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