Using CDS to meet capital rules creates uncertainty

10/3/2013 | (subscription required)

Allowing credit default swaps to mitigate margin requirements under Basel III means price fluctuation for the CDS as demand for their use varies. That is creating an unintended consequence. "What it means is the end of a single market-implied default probability," said Lloyds Banking Group's Chris Kenyon. "The unknown amount of capital relief included in CDS prices means a range of possible default probabilities, all market implied. That is going to add a level of complexity to CDS interpretation, and market-implied default probability use, for everybody."

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