ISDA is set to consider a change to roll protocols for single name credit default swaps, after market participants asked for a move away from the current quarterly framework, which would leave to significant savings in capital costs.
“A number of market participants have advised ISDA that an amendment to the schedule on when single-name credit default swaps roll to the new ‘on-the-run’ contract would likely improve liquidity in the market, and would be a general improvement to current market structure,” and ISDA spokesperson told IFR.
“ISDA’s Credit Steering Committee has been asked to consider a proposal that would recommend a new standard convention for the calendar frequency of when single-name CDS contracts move to new ‘on-the-run’ contracts.
“The proposed new convention would change the current quarterly frequency to a semi-annual frequency, further aligning single-name CDSs with indices.”
A move from four to two yearly roll dates would have the effect of reducing CDS notional outstandings, cutting the prohibitive capital costs that have undermined liquidity in the product. The Basel III leverage ratio framework contains a 5% add-on for investment-grade CDS and 10% for high-yield. That compares with a 0.5% add-on for interest rate swaps maturing in one to five years.
Bankers and investors told IFR in April that a move to biannual rolls was required to revive the fortunes of the single name market, amid declining liquidity in the asset class.
Deutsche Bank in October stepped back from the single-name CDS market, saying the bid/offer on uncleared contracts did not reflect economic reality. Other banks have since sold single-name CDS portfolios or made it clear they are restricting access to credit prime brokerage.
On a gross notional basis there was just under US$10trn outstanding at the end of last year, according to the Bank for International Settlements, around a quarter of the level at the market’s peak.
