During the week of 8 June 2009, Markit and Creditex conducted Credit Event Auctions (CEAs) to facilitate settlement of credit derivative trades referencing five global companies, including General Motors.
The auctions have been used to settle transactions in connection with the defaults of 38 companies so far this year in the U.S. and Europe and are an integral part of efforts by International Swaps and Derivatives Association (ISDA) to standardize critical elements of the credit default swap (CDS) market through the “Big Bang Protocol,” which came into force on 8 April 2009.
For General Motors, separate auctions were run to settle credit derivative contracts referencing both bond obligations (CDS) and loan obligations (LCDS). To facilitate physical settlement, nearly USD1 billion of General Motors bonds were traded in the CDS auction and just over USD100 million of General Motors loans traded in the LCDS auction. The final prices determined by the auctions were used by market participants who opted to cash-settle their contracts according to the ISDA Protocol.
CEAs are a transparent, efficient means of determining final recovery rates for the purpose of settling credit derivative transactions. The CEA process was launched in 2005 by Markit and Creditex in collaboration with ISDA and major credit derivative dealers. Since then, Markit and Creditex have conducted over 64 CEAs, including auctions for credit events such as Lehman Brothers, Fannie Mae, Freddie Mac and Washington Mutual.
L.D.