Amicus

Settlement Auction for Lehman CDS: Surprises Behind

Michael, great write-up. Thanks!

After looking over the Freddie/Fannie anomaly and reading through this, I have an alternative conjecture for your thesis about the "split result" in the last auction, in which the stop in one part of that auction trailed out at 99-something.

Could it be that the derivatives people participating in these auctions are simply ... not as skilled and used to running them as are, say, the primary dealers' desk?

While not inconsistent, per se, they look ... incomplete, in a technical sense of the term. I mean, look at Barclay's bids. Under what theory would bids peter out with *declining* price? Ditto Merrill Lynch. Compare that the Bank of America - their desk are willing to take the same amount of bonds at almost any price - with a bidding strategy like that, one imagines that ISDA should create a sidecar category for "non-compete" bids...

To be charitable, maybe it has to do with the structure of the auctions or the structure of the markets (can't treasury dealers go short in advance of auctions, in order to protect themselves?).

Last, keying off your insight about the impact that the net open interest might have on auction results, can we suggest that the reason that the reason the mid-market average came in below the pre-auction trading prices is that the net open interest was to sell bonds? Just under 60% of the satisfied limit orders were from three firms..

Last, I don't understand the Barclay's limit bids, in relation to the size of their physical settlement request. They put in a physical settlement request of $130m to buy, with a dealer bid at 8, then "won" $1,080m - almost 10x - with a weighted average bid of 9.47 in the limit order.