CDS Big Bang: Get Out Your Party Hats

Big Bang is an inauspicious nickname to say the least. On April 8th a "big bang" is set to occur in the Credit default swap world. This involves implementing and adhering to more standard protocols for settlement, auctions and centralized netting. Hopefully this will mitigate some of the risks in with these things. AIG was a nice look at the tip of the iceberg, but the view under the water line is anything but pretty.

The hope is the new netting provisions limit the chain settlement risk which can act like a liquidity vortex.

From my perspective the large notional amount of outstanding non-netted CDS contracts are just a way of passing around a long fused systemic Gamma firecracker.

Eventually it will go off and with enough exposure in a tight credit environment everyone gets invited to the party. AIG is the party MC and got stuck with the most fun so far.

Here is the document with some details about the bang. Download The Big Bang IM.Derivatives Alert 03.11.09

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