Tuesday, June 17, 2008

Do you know what your counterparty risk is?


The CDR Counterparty Risk Index is the property of Credit Derivatives Research LLC(FT Alphaville) Counterparty risk is all the rage in this post Bear Stearns world, and Credit Derivatives Research is hoping jittery investors will take a shine to its latest product - an index designed to track the credit risk of those banks and brokers who are the counterparties to most of the contracts traded in the CDS market.

The index averages the market spreads of the credit default swaps of the 15 major credit derivatives dealers - ABN Amro, Bank of America, BNP Paribas, Barclays, Citigroup, Credit Suisse, Deutsche, Goldman, HSBC, Lehman, JP Morgan, Merrill, Morgan Stanley, UBS, and Wachovia.

CDR’s chief strategist, Tim Backshall, says the group intends to license the index for trading either on an exchange or over-the-counter, so that investors “have a medium for laying off counterparty risk in a general way” - as opposed to buying CDS on an individual basis.

What is more interesting at this point is what the CDR Counterparty Risk index shows. As of June 13, the index was hovering around 118.7bp - in line with its year-to-date average of 116.9 and well below its Bear Stearns-induced peak of 250. In other words, traders in the CDS market seem to the think the crisis in financials is past (Lehman Brothers notwithstanding), although the market is a long way from those heady days when banks and brokers traded at 10 or 11bp.

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