Jennifer K. Grady, Jon Kibbe, Julia Lu Fu, Publications
Memorandum: ISDA's Evolving Auction Methodology Cash Settlement of Loan Credit Default Swaps
March 4, 2008
The deterioration in the credit markets over the past year has caused buyers of credit default protection increasingly to worry about their ability to realize the "recovery value" of the assets underlying the derivative transaction from their counterparty promptly after a credit default. The U.S. LCDS/LCDX family of secured loan credit default swap products benefits from a key design feature: prompt cash settlement through a binding, market-wide auction capable of generating trusted recovery values. The same auction technology is currently being adapted for use in Europe in connection with cash settlement of the European family of leveraged loan credit default swap and index products. Once finalized, the European loan credit default swap and index will be the first European derivative products to use a market-wide auction to set recovery values for cash settlement. This memorandum, written by our partners, Jon Kibbe, Julia Fu and Jennifer Grady, outlines the complex methodology used for LCDS/LCDX auctions, referencing the actual procedures used in the recent auction held for Movie Gallery, Inc. first lien loans as an example.
