David Rowe’s Risk Management Blog

In the past year contingent credit default swaps (CCDS) have gained significant market visibility.  These contracts provide default protection for an uncertain amount of exposure (the contingency implicit in the name) based on the fair market value of a reference swap.  As I point out in my October Risk Analysis column, it is somewhat ironic that banks have long been unable to assume such credit risk as part of a third party contract when they would happily assume it by undertaking the actual swap directly with the reference counterparty.  While this new contract may be a helpful tool in some cases, I argue that it has significant limitations.  (See: http://www3.sungard.com/SunGardFinancial/menus/documents/risk_managers/200710%20No%20Silver%20Bullet.pdf )

What do readers think about the future of CCDS and do you see some variation on this structure that would be more effective?  Are there possible portfolio applications, as opposed to single counterparty hedges, that could be addressed by a structure that references multiple counterparties?