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:
Author:
Publish date:

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]

Related