Credit Derivatives Dealers Hold Credit Event Fixing For Defaulted Delphi Bonds

Creditex, Inc. and Markit Group Limited partnered with 15 major credit derivative dealers to conduct a credit event fixing in an effort to generate cash settlement price for contracts referencing the defaulted bonds of Delphi Corporation, as agreed under the

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Creditex, Inc. and Markit Group Limited partnered with 15 major credit derivative dealers to conduct a credit event fixing in an effort to generate cash settlement price for contracts referencing the defaulted bonds of Delphi Corporation, as agreed under the Delphi CDS Index Protocol.

Delphi filed for bankruptcy on October 8, 2005, and is included in various credit derivative indices published by CDS IndexCo and Dow Jones.

“The enhanced methodology is a significant step forward in the ongoing development of the Credit Event Fixings and is laying the groundwork for a market-wide solution for a more efficient way to settle large numbers of contracts under a credit event,” said Mazy Dar, head of electronic platforms at Creditex.

The credit event fixing was used as part of a protocol developed by the International Swaps and Derivatives Association in consultation with dealers and the broader market. The Protocol enables the 574 adhering institutions to amend their credit derivative index contracts referencing Delphi from physical to cash settlement.

Along with entering a tradable bid and offer price as in previous fixings, auction participants were required to represent the bond position they would have held if the contracts had been physically settled. The new methodology reduces the overall basis risk between cash and physically settled contracts by making the participants indifferent between the two settlement methods for contracts covered by the protocol.

“The Delphi Credit Event Fixing was very important because it not only created a cash settlement price, but also enabled participants to transact bonds in the underlying auction, reducing basis risk and at the same time easing settlement issues,” said Kevin Gould, executive vice president and head of data products and analytics at Markit. “It was the largest and most significant auction to date, and marks another milestone in the development of the credit derivative market.”

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