• 12 Mar 2013 at 10:42 AM

Derivative Of Derided Derivatives In The Works

So credit-default swaps have a pretty bad rap in the wake of that whole financial crisis. And people apparently aren’t interested in trading things that some parts of the general public (otherwise known retail investors) blame for the aforementioned unpleasantness without actually understanding anything about CDS.

The IntercontinentalExchange has an idea to change all of that: Sell them that which they do not understand.

IntercontinentalExchange Inc. said it will launch credit-default swap futures in May, potentially opening up the clubby corner of the derivatives markets to retail and other new investors.

The creation of a successful CDS futures index could help revive parts of the credit-derivatives market, where outstanding volumes have fallen to $26.9 trillion as of last year, less than half their peak of $58 trillion in 2007….

“We are creating a simple, efficient product that brings in a large number of participants,” said Tom Farley, senior vice president of financial markets at ICE, in an interview from London.

The futures will be cash settled at expiry, said Mr. Farley, but traders said the exchange is considering an additional contract that will deliver a credit-default swap at expiry, similar to a recently launched CME contract that allows traders to take delivery of an interest-rate swap.

In another twist, the futures will be tied to an index that won’t be determined until the day of final settlement. Whereas a default by a single borrower can cause the value of index CDS to move sharply, something called “jump to default” risk, ICE’s futures would reference a version of the index that would strip out any defaulted names.

ICE to Launch Index CDS Futures in May [Dow Jones via Nasdaq]
ICE to Launch Credit-Default Futures in May [Fox Business]

17 comments (hidden to protect delicate sensibilities)
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Comments (17)

  1. Posted by Matt's Nervous Mom | March 12, 2013 at 10:50 AM

    Why is someone other than Matt writing about derivatives? Did he go swimming right after he ate something instead of waiting 30 minutes? Did he catch a cold after going out all night with Bess drinking margs and challenging random passersby to food eating challenges?

  2. Posted by Honestly. | March 12, 2013 at 11:30 AM

    Just terrible. Utterly terrible.

  3. Posted by Guest | March 12, 2013 at 11:38 AM

    Bravo Jon, you managed to use the word 'aforementioned,' in a three sentence long contribution. Bravo.

  4. Posted by VonSloneker | March 12, 2013 at 11:43 AM

    Sell them what they don't understand…works like a charm

    – SPDR Gold Shares ETF

  5. Posted by E. Texas Gas Trader | March 12, 2013 at 11:53 AM

    Sell the futures, buy the physical, sell the index, buy the basis = buying natural gas at index – 0.10!!!

    See??? We're buying gas at 10 cents under index!!! We are geniuses!! That's what PVM said anyway. Don't brag about it to the Geezer.

  6. Posted by guest | March 12, 2013 at 12:10 PM

    Di Da Da Da.

    -90's Commercial Quant

  7. Posted by el invitado | March 12, 2013 at 12:17 PM

    Speaking of "unpleasantness without actually understanding anything," stop writing. Forever.

  8. Posted by Guest | March 12, 2013 at 12:59 PM

    You too.

  9. Posted by guest | March 12, 2013 at 1:01 PM

    Involuntary voiding of my bowels is the result.

    -clean up in cubicle 8

  10. Posted by Guest | March 12, 2013 at 1:02 PM

    Matt's footnote's footnote > Shazar's full post

  11. Posted by The Edge | March 12, 2013 at 1:17 PM


  12. Posted by guest | March 12, 2013 at 1:26 PM

    Shazar probably stole the first paragraph of a Matthew post, and then copy/pasted text from the internets and pressed submit. Pretty much what he always has done. I have written Beth several emails complaining about this.

    – Matt's Mom

  13. Posted by AOL 4.0 | March 12, 2013 at 1:48 PM

    Jon still uses AOL

  14. Posted by Samuel Morse | March 12, 2013 at 1:52 PM


  15. Posted by gUEST | March 12, 2013 at 2:15 PM

    Shazar's short and humiliating posts get cuckolded by Matt's long articles every day.

  16. Posted by GuEsT | March 12, 2013 at 4:59 PM

    Ha ha, those suckers in the commentariat. They still don't understand that it is me, Matt, who is posing as Shazar, to enhance the contrast with my own posts and elevate their appreciation of my foot(note) fetish. Poor simpletons, they just don't get it…

  17. Posted by Guest | March 13, 2013 at 11:01 AM

    Can you explain that again?

    – J. Paulson