CDS - Credit Default Swaps
Sample Replication Filing #2 - Example of Replication (Synthetic Asset) - Transaction Documentation
- 1) The $500 cash outflow noted in year three represents the loss as defined in the swap agreement.
- This could be a function of stipulated market valuations, or tied to an index of recovery values (e.g., S&P). (p470)
1998-1, NAIC Proceedings - Valuation of Securities (EX.4) Task Force
- The working group received an update regarding credit derivatives and noted that a synthetic exposure that included a credit default swap could bring about more risk to the investor than the cash market equivalent due to the default event definition in the default swap. (p343)
-- 10. Report of the Valuation of Securities Task Force
2001-1, NAIC Proceedings
5. Replication Transactions
- Mr. Evangel read a report on these transactions prepared by Mr. Driscoll.
- Mr. Gorski asked the SVO staff to expand the report to include a more detailed discussion on the nature of credit default swaps and the counterparties involved in them. (p841)
Valuation of Securities Task Force
2002-1, NAIC Proceedings
The segment of the CDS market that experienced large losses and the greatest difficulties involved CDS related to asset backed securities linked to the subprime real estate market.
- Although the asset backed CDS market is a relatively small segment of the overall CDS market, large leveraged exposures in this segment magnified losses in the subprime real estate market.
- The root causes of the problems experienced with this segment of the CDS market arose from a number of sources, including primarily:
- the failure of sellers of credit protection, most notably monoline insurance companies, to collateralize their commitments as is customary in the corporate CDS market;
- an historic collapse in housing prices accompanied by soaring rates of mortgage delinquency and default;
- and a market-wide failure to appreciate the scope of the risk represented by exposure to the subprime real estate sector. (p251)
-- Submitted Statement of Citigroup
- (p30) - 12 New York State Insurance Dept., Recognizing Progress By Federal Government In Developing Oversight Framework For Credit Default Swaps, New York Will Stay Plan To Regulate Some Credit Default Swaps, press release, November 20, 2008 (‘‘Dinallo announced that New York had determined that some credit default swaps were subject to regulation under state insurance law and that the New York State Insurance Department would begin to regulate them on January 1, 2009.’’).
- (p30) - 13 New York State Insurance Dept., Recognizing Progress By Federal Government In Developing Oversight Framework For Credit Default Swaps, New York Will Stay Plan To Regulate Some Credit Default Swaps, press release, November 20, 2008 (Superintendent Dinallo stating ‘‘I am pleased to see that our strong stand has encouraged the industry and the Federal Government to begin developing comprehensive solutions. Accordingly, we will delay indefinitely regulating part of the market.’’)
2009 0204 and 0205 - GOV (House) - Hearings to Review Derivatives Legislation - [PDF-300p, VIDEO-?]
Does Reinsurance + Side Letters = CDS?
- One of the most widespread means of risk shifting is reinsurance, the act of paying an insurer to offset the risk on the books of a second insurer.
- This may sound pretty routine and plain vanilla, but what most people don’t know is that often times when insurers would write reinsurance contracts with one another, they would enter into “side letters” whereby the parties would agree that the reinsurance contract was essentially a canard, a form of window dressing to make a company, bank or another insurer look better on paper, but where the seller of protection had no intention of ever paying out on the contract.