Rising CDS action increases the strain The failures of Glitnir and Landsbanki not only add to the grim international roll-call of banks burnt out by the wild bushfire of the global liquidity crisis, they also lengthen the list of costly and complex tasks facing the derivatives markets. The two leading Icelandic banks bring to six the number of finance companies that have triggered credit default swap contracts, which provide a kind of insurance against non-payment of corporate debt, in little more than a month. The first effect of these financial failures is that those who sold protection (in simple terms, insurance) through CDS contracts must pay those who bought protection.
The failures of Glitnir and Landsbanki not only add to the grim international roll-call of banks burnt out by the wild bushfire of the global liquidity crisis, they also lengthen the list of costly and complex tasks facing the derivatives markets.
The two leading Icelandic banks bring to six the number of finance companies that have triggered credit default swap contracts, which provide a kind of insurance against non-payment of corporate debt, in little more than a month.
The first effect of these financial failures is that those who sold protection (in simple terms, insurance) through CDS contracts must pay those who bought protection.
And as a side note:
LCH.Clearnet has completed the wind-down of $9,000bn worth of overthecounter interest rate derivatives held by Lehman Brothers when it collapsed, the London-based independent central clearing house, said on Wednesday. The cleanup of the Lehman Brothers Special Financing Inc portfolio, which involved hedging and auctioning off of 66,390 trades across five leading currencies, was achieved without any of the SwapClear members involved seeing any losses, although many banks put up traders and risk and operations people to help. "The default was managed well within Lehman margin held and LCH.Clearnet will not be using the default fund in the management of the Lehman default," LCH said.
The cleanup of the Lehman Brothers Special Financing Inc portfolio, which involved hedging and auctioning off of 66,390 trades across five leading currencies, was achieved without any of the SwapClear members involved seeing any losses, although many banks put up traders and risk and operations people to help.
"The default was managed well within Lehman margin held and LCH.Clearnet will not be using the default fund in the management of the Lehman default," LCH said.
That last bit is rather good news altogether. In the long run, we're all dead. John Maynard Keynes
